SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
FOR THE YEAR ENDED DECEMBER 31, 1996
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $2.50 per share Common Stock registered on the
New York, Midwest and Pacific
Stock Exchanges
Debentures: Debentures registered on the
6.85%, final maturity 2013 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ].
The aggregate market value of voting stock held by nonaffiliates as of
January 31, 1997, (based upon the closing price of $77.125 per common
share as quoted on the New York Stock Exchange) is approximately
$18,437 million. For purposes of this computation, the shares of voting
stock held by Directors, Officers and the Employees' Retirement Plan
were deemed to be stock held by affiliates. Nonaffiliated common stock
outstanding at January 31, 1997 numbered 239,055,246 shares.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders to be
held May 15, 1997.
-1-
THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 50
Signatures 53
-2-
PART I
ITEM 1. BUSINESS
THE COMPANY
The Dow Chemical Company was incorporated in 1947 under Delaware
law and is the successor to a Michigan corporation, of the same
name, organized in 1897. The Company is engaged in the
manufacture and sale of chemicals, plastic materials,
agricultural and consumer products and other specialized products
and services. Its principal executive offices are located at
2030 Dow Center, Midland, Michigan 48674, telephone 517-636-1000.
Except as otherwise indicated by the context, the terms "Company"
or "Dow" as used herein mean The Dow Chemical Company and its
consolidated subsidiaries.
BUSINESS AND PRODUCTS
Corporate Profile
The Corporate Profile is an integral part of Note S to the
Financial Statements.
Dow is a diversified, worldwide manufacturer and supplier of
chemicals, plastics, energy, agricultural products, consumer
goods and environmental services.
Performance Plastics
Global Businesses:
Adhesives, Sealants and Coatings
Engineering Plastics
Epoxy Products and Intermediates
Fabricated Products
Insite Technology Licensing
Polyurethanes
Dow's Performance Plastics businesses provide customers with
high-performance polymers and products to meet specialized needs.
The company offers the broadest range of engineering
thermoplastic and thermoset materials of any manufacturer.
Polyurethane products, like Voranol polyether polyols and
isocyanates, are used by such industries as automotive,
furniture, and building and construction. Dow is the leading
producer globally of allyl chloride and epichlorohydrin, which
are basic products for the epoxy product chain. Dow's epoxy
products and intermediates are used in a variety of applications,
including the protective coatings, electronics and personal care
industries. Engineering plastics products, like Calibre
polycarbonate resins, Magnum ABS resins and Pulse engineering
resins, serve such industries as appliance, automotive and
electronics. The Adhesives, Sealants and Coatings business
manufactures products like Betaseal window adhesives. Insite
technology enables Dow and Dow's customers to produce a range of
plastics that perform better and are easier to process. Styrofoam
brand plastic foam, used in the building and construction
industry, is the flagship brand for the Fabricated Products
business.
Performance Chemicals
Global Businesses:
Specialty Chemicals
Emulsion Polymers
DowElanco
Dow's Performance Chemicals businesses provide specialized
products used by customers in a variety of industries, including
automotive, consumer products, food processing, pulp and paper,
and crop protection. The Specialty Chemicals business includes
products like Drytech superabsorbent polymers, used to produce
thinner, more absorbent disposable diapers; Methocel
multifunctional food gums, used in formulations where there is a
need to replace fat, retain moisture and contribute to pleasing
texture; and Dowtherm fluids, heat fluids used to control process
temperature. The Emulsion Polymers business includes latex
coatings and binders, which are used in the building and
construction and the pulp and paper industries. Dow is the
largest and most globally diverse of the styrene butadiene latex
suppliers and is the largest supplier of latex to the paper
industry. Dow produces acrylic latex for use in paints and other
architectural coatings. DowElanco produces agricultural products
like Broadstrike herbicides and Dursban and Lorsban insecticides,
which are used in crop protection and production and for
industrial pest control. The company is also a front-runner in
the development of natural insect control techniques.
-3-
Plastics
Global Businesses:
Polyethylene
Polyethylene Terephthalate (PET)
Polystyrene
Polypropylene
Dow ranks among the largest plastics producers in the world. The
company supplies products to a variety of industries, including
electronics, durable goods, food service, health care, packaging
and recreation. Dow is the leading producer of polyethylene, such
as low-density polyethylene and Dowlex linear low-density
polyethylene, and polystyrene, such as Styron polystyrene and Aim
advanced styrenic resins. The company has recently entered both
the polypropylene and polyethylene terephthalate (PET) markets,
the two fastest growing polymers in the world, supplying the
automotive and packaging industries, respectively.
Chemicals and Metals
Global Businesses:
Chemicals and Metals
Dow's Chemicals and Metals products are sold to a wide variety
of industries, ranging from food processing to automotive, that
use them as either processing aids or raw materials. Dow is the
world's largest chlorine and caustic soda manufacturer, with
about twice as much capacity as the next largest producer. Some
uses of chlorine include pharmaceuticals, water purification and
the manufacture of plastics. Caustic soda is used in detergents,
pulp and paper, petroleum refining and the manufacture of
aluminum. Other important products include chloromethanes,
ethylene dichloride, ethylene glycol, ethylene oxide, magnesium,
perchloroethylene, propylene glycol, propylene oxide,
trichloroethylene and vinyl chloride monomer.
Hydrocarbons and Energy
Global Businesses:
Hydrocarbons and Energy
Dow is the world leader in olefins and styrene production. This
segment encompasses procurement of fuels and crude oil-based raw
materials as well as the production of olefins, aromatics,
styrene and cogenerated power and steam for use in the Company's
operations. Destec Energy, Inc., a Dow subsidiary, is one of the
larger independent power producers in the world. It develops
independent power projects and sells electrical and thermal
energy.
Diversified Businesses and Unallocated
Global Businesses:
DowBrands
New Businesses
DowBrands produces household products such as Dow bathroom
cleaner with Scrubbing Bubbles, Fantastik all-purpose cleaner,
Spray'N Wash tough stain remover, Glass Plus multi-surface
cleaner, Saran Wrap plastic film and Ziploc plastic bags. New
Businesses consists of Radian International LLC, Advanced
Materials, technology licensing and new developments. Radian
International LLC provides a broad array of environmental and
chemical management services. Advanced Materials develops and
markets electronic and structural materials such as Cyclotene
dielectric resins, tungsten carbide and aluminum nitride powders.
Insurance and Finance, including Dorinco Reinsurance Company, and
other Dow financial companies and holdings, are reported in this
segment. Activities and overhead cost variances not allocated to
other segments are included in Unallocated.
Industry Segments and Geographic Area Results
See Note S to the Financial Statements for a discussion of
sales, operating income and identifiable assets by industry
segment and geographic area.
-4-
Raw Materials
The Company operates in an integrated manufacturing environment.
Basic raw materials are processed through many stages to produce
a number of products that are sold as finished goods at various
points in those processes.
The two major raw material streams that feed the integrated
production of the Company's finished goods are Chlor-Alkali and
Hydrocarbon based raw materials.
Salt, limestone and natural brine are the base raw materials
used in the production of Chlor-Alkali products and derivatives.
The Company owns salt deposits in Louisiana, Michigan and Texas;
Alberta, Canada; Brazil; and Germany. The Company also owns
natural brine deposits in Michigan and limestone deposits in
Texas.
Hydrocarbon raw materials include liquefied petroleum gases
(LPG), crude oil, naphtha, natural gas, benzene, fuel oil and
coal. These raw materials are used in the production of both
saleable products and energy. Expenditures for these raw
materials accounted for 28% of the Company's operating costs and
expenses for the year ended December 31, 1996. These raw
materials are purchased by the Company both on long-term
contracts and as they become available on global markets. The
Company owns the rights to deposits of lignite in Texas and
Louisiana, and natural gas deposits in Germany.
Other significant raw materials include ammonia, acrylonitrile,
aniline, bisphenol, cellulose, octene, organic acids, and toluene
diamine. These raw materials are purchased by the Company both on
long-term contracts and as they become available on global
markets.
The Company has, and expects to continue to have, adequate
supplies of raw materials during 1997 and subsequent years.
Method of Distribution
All products and services are marketed primarily through the
Company's sales force, although in some markets more emphasis is
placed upon sale through distributors. No significant portion of
the business of any industry segment is dependent upon a single
customer.
Competition
The Company experiences substantial competition in each of its
industry segments. During 1996, the Company was the second
largest chemical company in the United States in terms of sales
and in the top five worldwide in terms of sales. The chemical
industry has been historically competitive and this condition is
expected to continue. The chemical divisions of the major
international oil companies also provide substantial competition
both in the United States and abroad. The Company competes
worldwide on the basis of quality, price and customer service.
Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States
and foreign patents. At December 31, 1996 the Company owned
approximately 3,300 active United States patents and
approximately 6,900 active foreign patents, which can be
classified as follows: chemicals, 900 United States and 1,500
foreign; plastics, 1,300 United States and 2,700 foreign;
fabricated products, 400 United States and 1,000 foreign; and new
businesses, 700 United States and 1,600 foreign. Dow's primary
purpose in obtaining patents is to protect the results of its
research for use in operations and licensing. Dow is also party
to a substantial number of patent licenses and other technology
agreements. The Company had patent and technology royalty income
of $26 million in 1996, $23 million in 1995 and $21 million in
1994, and incurred royalties to others of $5 million in 1996, $6
million in 1995, and $8 million in 1994. Dow also has a
substantial number of trademarks and trademark registrations in
the United States and in other countries, including the "Dow in
Diamond" trademark. Although the Company considers that, in the
aggregate, its patents, licenses and trademarks constitute a
valuable asset, it does not regard its business as being
materially dependent upon any single patent, license or
trademark.
-5-
Research and Development
The Company is engaged in a continuous program of basic and
applied research to develop new products and processes, to
improve and refine existing products and processes and to develop
new applications for existing products. Research and Development
expenses were $761 million in 1996 compared to $808 million in
1995 and $783 million in 1994. The Company employs approximately
5,200 people in various research and development activities.
Other Activities
Dow engages in the property and casualty insurance and reinsurance
business through its Liana Limited subsidiaries.
Principal Partly Owned Companies
Principal companies in which Dow owns a 50 percent interest
include DuPont Dow Elastomers L.L.C., which manufactures and
markets thermoset and thermoplastic elastomer products; Dow-
United Technologies Composite Products, Inc., a manufacturer of
composite products; Gurit-Essex, A.G., a Swiss company, which
supplies European automobile manufacturers with proprietary
specialty products; and Dow Corning Corporation, a manufacturer
of silicone and silicone products, which voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code
(see Note Q to the Financial Statements). In addition, Dow has a
45 percent interest in Total Raffinaderij Nederland N.V., which
provides feedstocks for Dow's major petrochemical site at
Terneuzen, the Netherlands, and also services the Benelux and
nearby markets.
Protection of the Environment
Matters pertaining to the environment are discussed in Legal
Proceedings, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes A and Q to the
Financial Statements.
Financial Information About Foreign and Domestic Operations and
Export Sales
In 1996, the Company derived 56 percent of its sales and had 47
percent of its property investment outside the United States.
While the Company's international operations may be subject to a
number of additional risks, such as changes in currency exchange
rates, the Company does not regard its foreign operations, on the
whole, as carrying any greater risk than its operations in the
United States. Information on sales, operating income and
identifiable assets by geographic area for each of the last three
years appears in Note S to the Financial Statements and a
discussion of the Company's risk management program for foreign
exchange and interest rate risk management appears in Note J to
the Financial Statements.
Number of Products
Dow manufactures and supplies more than 2,400 product families
and services and no single one accounted for more than 5 percent
of the Company's consolidated sales in 1996. No significant
portion of the business of any industry segment is dependent upon
a single customer.
Employees
The personnel count at December 31, 1996 was 40,289 versus 39,537
at the end of 1995, and 53,730 at the end of 1994. The large
reduction from 1994 reflected the sale of Dow's pharmaceutical
businesses. The increase in 1996 over 1995 included the impact of
new acquisitions which increased the personnel census by
approximately 3,100. Taking these two factors into account, the
personnel count has shown a substantial reduction in each year
due to continuing rationalization and work process improvements
throughout the company.
-6-
ITEM 2. PROPERTIES
The Company operates 115 manufacturing sites in 37 countries. The
Company considers that its properties are in good operating condition
and that its machinery and equipment have been well maintained. The
Company's Chemicals and Plastics production facilities and plants
operated at approximately 89 percent of capacity during 1996. The
following are the major production sites:
United States: Midland, Michigan; Freeport, Texas; Pittsburg,
California; Plaquemine, Louisiana.
Canada: Sarnia, Ontario; Fort Saskatchewan, Alberta.
Germany: Stade; Rheinmuenster.
France: Drusenheim.
The Netherlands: Terneuzen.
Spain: Tarragona.
Argentina: Bahia Blanca.
Brazil: Aratu.
Including the major production facilities, the Company has plants and
holdings in the following geographic areas:
United States: 40 manufacturing locations in 16 states.
Canada: 7 manufacturing locations in 3 provinces.
Europe: 28 manufacturing locations in 15 countries.
Latin America: 16 manufacturing locations in 8 countries.
Pacific: 24 manufacturing locations in 12 countries.
All of the above Dow plants are owned in fee, subject to certain
easements of other persons which, in the opinion of Management, do not
substantially interfere with the continued use of such properties or
materially affect their value.
A summary of plant properties, classified by type, is contained in
Note G to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50 percent
stockholders in Dow Corning Corporation ("Dow Corning"). Dow Corning,
and in many cases the Company and Corning as well, have been sued in a
number of individual and class actions by plaintiffs seeking damages,
punitive damages and injunctive relief in connection with injuries
purportedly resulting from alleged defects in silicone breast
implants. In addition, certain stockholders of the Company have filed
separate consolidated class action complaints alleging that the
Company, Dow Corning or some of their respective Directors violated
duties imposed by the federal securities laws regarding disclosure of
alleged defects in silicone breast implants. The Company and one of
its former officers have also been sued in two separate class action
complaints (now consolidated) alleging that the defendants violated
duties imposed by the federal securities laws regarding disclosure of
information material to a reasonable investor's assessment of the
magnitude of the Company's exposure to direct liability in silicone
breast implant litigation. In a separate action, a Corning
stockholder has sued certain Dow Corning Directors (including certain
former and current Company Directors) alleging breaches of state law
duties relating to the manufacture and marketing of silicone breast
implants and seeking to recover unquantified money damages
derivatively on Corning's behalf.
Two separate derivative actions have been brought in the federal
court, Southern District of New York, by Company stockholders
purportedly on the Company's behalf. In Kas, et al. v. Butler, et
al., two Company stockholders brought suit in 1992, naming as
defendants all persons who were serving the Company as Directors on
December 31, 1990, certain Dow Corning Directors, Dow Corning, Corning
and certain Dow Corning officers, seeking derivatively on the
Company's behalf unquantified money damages. In Rubinstein, et al. v.
Ludington, et al., four Company stockholders brought suit in 1992,
naming as defendants Dow Corning's Directors who were also Company
Directors and certain former Company Directors, also seeking
derivatively on the Company's behalf unquantified money damages.
Plaintiffs in both cases subsequently made demands that the Company's
Board bring suit on behalf of the Company. After the Board rejected
those demands, the plaintiffs refiled their complaints alleging that
the demands were wrongfully rejected.
On May 15, 1995, Dow Corning announced that it had voluntarily filed
for protection under Chapter 11 of the United States Bankruptcy Code.
Under Chapter 11, all claims against Dow Corning (although not against
its co-defendants) are automatically stayed.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the Company's
management that the possibility that these actions will have a
material adverse impact on the Company's consolidated financial
statements is remote, except as described below.
-7-
Breast Implant Matters (Continued)
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993. In
January 1995, Dow Corning announced a pretax charge of $241 million
($152 million after tax) for the fourth quarter of 1994. These
charges included Dow Corning's best estimate of its potential
liability for breast implant litigation based on a global Breast
Implant Litigation Settlement Agreement (the "Settlement Agreement");
litigation and claims outside the Settlement Agreement; and provisions
for legal, administrative and research costs related to breast
implants. The charges for 1993 and 1994 included pretax amounts of
$1,240 million and $441 million, respectively, less expected insurance
recoveries of $600 million and $200 million, respectively. The 1993
amounts reported by Dow Corning were determined on a present value
basis. On an undiscounted basis, the estimated liability above for
1993 was $2,300 million less expected insurance recoveries of $1,200
million. As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits available to
the Company. The impact on the Company's net income was a charge of
$192 million for 1993 and a charge of $70 million for 1994.
Dow Corning reported an after-tax net loss of $167 million for the
second quarter of 1995, of which the Company's share amounted to $83
million. Dow Corning's second quarter loss was a result of a $221
million after-tax charge taken to reflect a change in accounting
method from the present value basis noted above to an undiscounted
basis resulting from the uncertainties associated with its Chapter 11
filing. As a result of Dow Corning's 1995 second quarter loss and
Chapter 11 filing, the Company recognized a pretax charge against
income of $330 million for the second quarter of 1995, fully reserved
its investment in Dow Corning and will not recognize its 50 percent
share of future equity earnings while Dow Corning remains in Chapter
11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States
District Court for the Northern District of Alabama approved the
Settlement Agreement pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded that
the Settlement Agreement was not workable in its then-current form
because the funds committed to it by industry participants were
inadequate. The order provided that plaintiffs who had previously
agreed to participate in the Settlement Agreement could opt out after
November 30, 1995.
The Company's maximum exposure for breast implant product liability
claims against Dow Corning is limited to its investment in Dow Corning
which, after the second quarter charge noted above, is zero. As a
result, any future charges by Dow Corning related to such claims or as
a result of the Chapter 11 proceeding would not have an adverse impact
on the Company's consolidated financial statements.
The Company is separately named as a defendant in over 13,000 breast
implant product liability cases. In these situations, plaintiffs have
alleged that the Company should be liable for Dow Corning's alleged
torts based on the Company's 50 percent stock ownership in Dow Corning
and that the Company should be liable by virtue of alleged "direct
participation" by the Company or its agents in Dow Corning's breast
implant business. These latter, direct participation claims include
counts sounding in strict liability, fraud, aiding and abetting,
conspiracy, concert of action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel on
Multidistrict Litigation to oversee all of the product liability cases
involving silicone breast implants filed in the U.S. federal courts.
Initially, in a ruling issued on December 1, 1993, Judge Pointer
granted the Company's motion for summary judgment, finding that there
was no basis on which a jury could conclude that the Company was
liable for any claimed defects in the breast implants manufactured by
Dow Corning. In an interlocutory opinion issued on April 25, 1995,
however, Judge Pointer affirmed his December 1993 ruling as to
plaintiffs' corporate control claims but vacated that ruling as to
plaintiffs' direct participation claims.
In his opinion, Judge Pointer reaffirmed the view he had expressed
in his December 1993 ruling that the Company is a separate,
independent entity from Dow Corning and therefore has no legal
responsibility as a result of its ownership of Dow Corning stock for
Dow Corning's breast implant business. However, Judge Pointer stated
that, under the law of at least some states (although not necessarily
all states), actions allegedly taken by the Company independent of its
role as a stockholder in Dow Corning could give rise to liability
under a negligence theory. Judge Pointer declined to address
plaintiffs' other legal theories, including strict liability, fraud,
aiding and abetting, conspiracy and concert of action. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of the federal product liability cases. The
Company has filed claims with insurance carriers to recover in the
event it is held liable in the federal (or any other) breast implant
litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California ruling
was final and was appealed. On September 25, 1996, the California
Court of Appeals for the 4th District affirmed the trial court's order
granting summary judgment to the Company. On January 15, 1997, the
California Supreme Court granted plaintiffs' petition for a review of
that order. The Michigan ruling was made final on March 20, 1997. This
decision may be appealed by plaintiffs. The New Jersey ruling has been
reconsidered and all claims were again dismissed, except the negligence
claim. Plaintiffs in New York filed a motion to reconsider based on
Judge Pointer's April 25, 1995 ruling. On September 22, 1995, Judge
Lobis, presiding over the consolidated New York breast implant
litigation, dismissed all counts of all cases filed against the Company in
-8-
Breast Implant Matters (Continued)
New York on the ground that no reasonable jury could find against the
Company. On May 28, 1996, the New York Supreme Court Appellate
Division affirmed the lower court's dismissal of all claims against
the Company. New York's highest court subsequently denied plaintiffs'
petition for review, and the order dismissing all claims against the
Company is now final. Other rulings that are not final decisions are
also subject to reconsideration by the trial courts. The Company
expects that plaintiffs will file motions to reconsider in some states
as a result of Judge Pointer's April 25 decision. The Company remains
a defendant in other breast implant product liability cases originally
brought in state courts and continues to be named as a defendant as
cases are filed in various courts. On October 20, 1996, in a Louisiana
state court breast implant case styled Spitzfaden v. Dow Corning, et
al., the court entered an order maintaining certification of a class
of Louisiana plaintiffs consisting of recipients of Dow Corning breast
implants who, as of January 15, 1997, (i) are residents of Louisiana,
(ii) are former residents of Louisiana who are represented by
Louisiana counsel, or (iii) received their implants in Louisiana and
are represented by Louisiana counsel, together with the spouses and
children of such plaintiffs, and representatives of the estates of
class members who are deceased. The trial of the first phase of this
case commenced on March 17, 1997. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any of the
state product liability cases.
The Company is also a defendant in ten federal silicone jaw implant
cases involving implants manufactured by Dow Corning. Federal
District Court Judge Paul A. Magnuson has been appointed by the
Federal Judicial Panel on Multidistrict Litigation to oversee all of
the product liability cases involving silicone jaw implants filed in
the U.S. federal courts. On March 31, 1995, Judge Magnuson granted
the Company's motion for summary judgment, concluding, based on
virtually the same arguments that were presented to Judge Pointer,
that no reasonable jury could find in favor of plaintiffs on any of
their claims against the Company. On June 13, 1995, Judge Magnuson
denied plaintiffs' motion to reconsider his ruling based on Judge
Pointer's April 25 decision, and granted the Company's request to
enter a final judgment in its favor. Plaintiffs have appealed the
final judgment to the U.S. Court of Appeals for the Eighth Circuit.
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas, granted in
part and denied in part the Company's motion for summary judgment.
Judge Schneider granted the Company's motion as to (i) all claims
based on the Company's stockholder status in Dow Corning, (ii) the
claim that the Company was liable in negligence for failing to
supervise Dow Corning, and (iii) plaintiffs' licensor-licensee claim.
Judge Schneider denied the Company's motion with regard to plaintiffs'
claims sounding in fraud, aiding and abetting, conspiracy, certain
negligence claims and a claim brought under the Texas Deceptive Trade
Practices Act. As a result, the Company remains a defendant as to
such claims in the Harris County product liability cases. In those
cases (and in cases brought in certain other jurisdictions including
those before Judge Pointer), the Company has filed cross-claims
against Dow Corning on the ground that if the Company and Dow Corning
are found jointly and severally liable, Dow Corning should bear
appropriate responsibility for the injuries judged to be caused by its
product. In certain jurisdictions, the Company has also filed
similar cross-claims against Corning. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any of the
Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews, presiding
in the consolidated breast implant cases in Dallas County, Texas,
granted the Company's motion for summary judgment "in all respects
except as to theories of conspiracy and strict liability as a
component supplier." As a result, the Company remains a defendant as
to such claims in the Dallas County product liability cases. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of these actions.
Three breast implant product liability cases brought against the
Company have now been tried to judgment. In February 1995, a Harris
County jury exonerated the Company in one case and found the Company
jointly and severally liable with Dow Corning for $5.23 million on a
single count in a second case. After the verdict, however, the Court
overturned the jury's verdict and entered judgment for the Company.
On October 30, 1995 a state court jury in Reno, Nevada found the
Company liable for $4.15 million in compensatory damages and $10
million in punitive damages. The Company has appealed the verdict.
The Company has filed a claim in Dow Corning's bankruptcy proceedings
to recover from Dow Corning its share of any monies the Company might
pay as a result of the Nevada verdict.
With the principal exception of the cases filed in Michigan and
approximately 500 cases filed in Texas, Dow Corning or the Company
have removed virtually all cases originally filed in state courts
across the country to various federal courts. The removed cases have
been, in most instances, transferred to Judge Pointer for pre-trial
proceedings. Plaintiffs have asked Judge Pointer to remand those
cases back to their states of origin, and the Company has opposed that
motion. On April 9, 1996, the United States Court of Appeals for the
Sixth Circuit ruled that because silicone gel breast implant claims
against the Company (and certain other parties) were "related to" Dow
Corning's bankruptcy, the federal District Court for the Eastern
District of Michigan had the power to transfer such claims, including
claims currently pending before Judge Pointer, to itself and ordered
that Court to decide whether to make such a transfer. On July 30,
1996, the District Court declined to order such a transfer. The
Company has appealed that decision.
It is the opinion of the Company's management that the possibility
is remote that plaintiffs will prevail on the theory that the Company
should be liable in the breast implant litigation because of its
stockholder relationship with Dow Corning. The
-9-
Breast Implant Matters (Continued)
Company's management believes that there is no merit to plaintiffs'
claims that the Company is liable for alleged defects in Dow Corning's
silicone products because of the Company's alleged direct
participation in the development of those products, and the Company
intends to contest those claims vigorously. Management believes that
the possibility is remote that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against those
claims, will have a material adverse impact on the Company's financial
position or cash flows. Nevertheless, in light of Judge Pointer's
April 25 ruling, it is possible that a resolution of plaintiffs'
direct participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the Company's
net income for a particular period, although it is impossible at this
time to estimate the range or amount of any such impact.
Seldane
In July 1992, two class actions lawsuits were filed in the United
States District Court for the Western District of Missouri alleging
that Marion Merrell Dow Inc. ("MMD"), then a subsidiary of the
Company, violated the federal securities laws as a result of alleged
false statements and omissions regarding the drug Seldane. The suits,
which were brought by purchasers of MMD stock and sought unquantified
damages, also named the Company as a defendant, principally because of
its status as an alleged "controlling person" of MMD. In addition to
seeking recovery against MMD and the Company, the suits named as
defendants a variety of entities and individuals including certain
Directors of MMD (some of whom are also Directors of the Company) and
certain underwriters of a 1992 offering of MMD stock. Subsequently,
plaintiffs filed a consolidated amended class action complaint in the
same court consolidating the two previously filed complaints and
captioned In re Marion Merrell Dow Securities Litigation. The
consolidated amended class action complaint does not name the Company
as a defendant but reserves the right to name the Company in the
future should discovery disclose a basis for doing so. In December
1992, plaintiffs and the Company entered into an agreement
conditionally tolling the statute of limitations as to any action
against the Company.
In addition, in July 1992, a derivative suit captioned Harris J.
Sklar v. Ewing M. Kauffman, et al. was filed in the Court of Chancery
of the State of Delaware against MMD (as nominal defendant) and
certain past and present Directors of MMD, including Messrs. Falla,
Popoff and Stavropoulos, who are also Directors of the Company. The
suit sought unquantified damages allegedly suffered by MMD as a result
of alleged breaches of fiduciary duty and waste of corporate assets by
its Directors in connection with the marketing of Seldane and alleged
disclosures and omissions regarding Seldane made to consumers and to
the investing public. On February 28, 1993, the Court entered an
order dismissing without prejudice the complaint as against all
defendants.
Management believes that the above actions are without merit.
Furthermore, it is the opinion of the Company's management that the
possibility that litigation of these claims would materially impact
the Company's consolidated financial statements is remote.
Environmental Matters
On May 31, 1994, the EPA filed an action against the Company alleging
violations of the Clean Water Act at the Company's Ludington, Michigan
site. Proposed civil fines total $125,000.
On August 11, 1995, the EPA filed an administrative enforcement
action against the Company in connection with the Company's report of
exceedances of its limits for the discharge of phosphorus and certain
other chemicals to the Tittabawassee River for several months in 1994
and 1995. No demand for monetary sanctions was made. Based on the
same facts, Michigan's Attorney General and the Michigan Department of
Natural Resources filed an action against the Company on August 18,
1995 in the Circuit Court for Ingham County, Michigan and on September
23, 1996, the Company paid a court ordered civil penalty of $100,000.
A third action, also based on the same facts, was filed on August 15,
1995 in the U.S. District Court for the Eastern District of Michigan
by PIRGIM Public Interest Lobby. That action seeks the payment of a
$10,775,000 civil penalty plus costs and attorney fees.
In February 1996, the Michigan Department of Environmental Quality
demanded payment of $258,000 in civil penalties associated with a
notice of Violation and Proposed Consent Order issued on November 16,
1995, for alleged violations of hazardous waste regulations. Pursuant
to a Consent Order entered into on November 8, 1996, the Company paid
a civil penalty of $25,000 plus $7,000 in compensation for the costs
of surveillance and enforcement.
Dow Chemical Canada Inc. ("Dow Canada"), a wholly owned subsidiary
of the Company, has been investigated by Alberta Environment
Protection with respect to two violations of the Ozone-Depleting
Substances Regulation alleged to have occurred on May 31, 1995, and
March 26, 1996. On November 18, 1996, Dow Canada paid a fine of
$150,000 (Canadian) in addition to alternative sentencing payments of
$75,000 (Canadian) paid in trust to each of The University of Alberta
and the Environmental Law Committee.
The Company entered into a Consent Order on February 11, 1997, with
respect to Notices of Violation issued by the Michigan Department of
Environmental Quality alleging that failure of the Company's
groundwater intercept system had resulted in the release of
contaminated groundwater to the Tittabawasse River. In addition to
system upgrades and other work, the Company agreed to pay a civil fine
of $800,000 and $133,000 in compensation for the costs of surveillance
and enforcement.
-10-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market for the Company's common stock is the New York
Stock Exchange. On February 13, 1997, the Company declared a cash
dividend of 75 cents per share, payable April 30, 1997, to stockholders
of record on March 31, 1997. This will be the 341st consecutive
quarterly dividend since 1912. There were 103,753 common stockholders
of record as of March 17, 1997. The Company estimates that there are an
additional 130,000 stockholders whose shares are held in nominee names,
or in dividend reinvestment accounts without underlying registered
shares.
Quarterly market and dividend information can be found in Part II,
Item 8 (Supplementary Data) on page 49.
-11-
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The Dow Chemical Company and Subsidiaries
Five-year Summary of Selected Financial Data
<CAPTION>
In millions, except as noted Unaudited 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Summary of Operations (3)
Net sales $20,053 $20,200 $16,742 $15,052 $15,493
Cost of sales 14,108 13,337 12,131 11,370 11,862
Insurance and finance company operations,
pretax (income) (78) (61) (40) (98) (15)
Research and development expenses 761 808 783 786 799
Promotion and advertising expenses 370 416 411 367 381
Selling and administrative expenses 1,766 1,771 1,594 1,485 1,583
Amortization of intangibles 39 38 43 68 45
Special charge 0 0 0 0 433
--------------------------------------
Operating income 3,087 3,891 1,820 1,074 405
Investment and sundry income 405 (222) 77 462 145
Interest expense-net (204) (140) (271) (278) (443)
--------------------------------------
Income before provision for taxes on
income and minority interests 3,288 3,529 1,626 1,258 107
Provision for taxes on income 1,187 1,442 654 514 67
Minority interests' share in income 194 196 200 171 120
Preferred stock dividends 7 7 7 7 7
--------------------------------------
Income from continuing operations 1,900 1,884 765 566 (87)
Cumulative effect of accounting change - - - - (765)
Discontinued operations net of taxes on income - 187 166 71 356
- ------------------------------------------------------------------------------------------------
Net income (loss) available for common stockholders 1,900 2,071 931 637 (496)
- ------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income from continuing operations $7.71 $7.03 $2.77 $2.07 ($0.32)
Net income available for common stockholde $7.71 $7.72 $3.37 $2.33 $0.99
Cash dividends declared $3.00 $2.90 $2.60 $2.60 $2.60
Cash dividends paid $3.00 $2.80 $2.60 $2.60 $2.60
Average common shares outstanding (thousands) 246,329 268,243 276,094 273,620 271,647
Convertible preferred shares outstanding (thousands) 1,482 1,521 1,549 1,567 1,586
- -----------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $24,673 $23,582 $26,545 $25,505 $25,360
Working capital 3,826 4,953 2,075 2,001 1,802
Property-gross 23,737 23,218 23,210 21,608 21,444
Property-net 8,484 8,113 8,726 8,580 8,801
Long-term obligations and redeemable preferred stock 4,230 4,733 5,325 5,918 6,201
Total debt 5,468 5,403 6,578 6,944 7,469
Net stockholders' equity 7,954 7,361 8,212 8,034 8,064
- -----------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as percent 3.8% 4.0% 4.7% 5.2% 5.2%
Income before provision for taxes and minority
interests as percent of net sales (3) 16.4% 17.5% 9.7% 8.4% 0.7%
Return on stockholders' equity (1) 23.8% 26.9% 11.3% 7.9% 3.3%
Book value per common stock (dollars) $33.13 $30.69 $29.71 $29.33 $29.62
Debt as a percentage of total capitalization 35.2% 36.3% 38.0% 39.8% 42.5%
- -----------------------------------------------------------------------------------------------
General
Capital expenditures $1,344 $1,417 $1,183 $1,397 $1,595
Depreciation (3) 1,259 1,369 1,224 1,252 1,260
Wages and salaries paid 2,944 2,734 3,239 3,332 3,263
Cost of employee benefits 700 696 832 887 938
Number of employees at year-end (thousands) 40.3 39.5 53.7 55.4 61.4
Number of stockholders of record at year-end 104.6 111.1 114.5 102.5 105.9
- -----------------------------------------------------------------------------------------------
(1) Before cumulative effect of accounting change in 1992.
(2) Stockholders of record as reported by the transfer agent. The Company estimates that there
are an additional 130,000 stockholders whose shares are held in nominee names,
or in dividend reinvestment accounts without underlying registered shares.
(3) Restated for the sale of the pharmaceutical businesses in 1995.
-12-
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Dow's 1996 sales were $20.1 billion, nearing the record sales of $20.2
billion achieved in 1995 and up 20 percent from 1994's sales of $16.7
billion. Dow's 1996 sales reflected a 7 percent volume gain which
largely offset an 8 percent price decline (see Sales Price and Volume
table on page 18). The company experienced steady demand growth
throughout the year with volume up across all segments and
geographies. Volume growth was particularly strong in Latin America as
a result of strategic acquisitions. Selling prices were down in all
segments with the exception of Diversified Businesses.
Sales in the United States (U.S.) accounted for 44 percent of the
total sales in 1996, 45 percent in 1995 and 48 percent in 1994. Sales
and other data by industry segment and geographic area are provided in
Note S to the Financial Statements.
The following paragraphs discuss the current performance and
outlook of each of the company's business segments. The forward-
looking statements contained therein involve risks and uncertainties
that affect the company's operations, markets, products, services,
prices and other factors as discussed in filings with the Securities
and Exchange Commission (SEC). These risks and uncertainties include,
but are not limited to, economic, competitive, governmental and
technological factors.
PERFORMANCE PLASTICS
Sales for Performance Plastics were $5.3 billion compared with $5.4
billion in 1995 and $4.5 billion in 1994. A volume gain of 3 percent
partially offset a price decline of 4 percent compared with the
previous year.
Operating income rose 11 percent to a record $1.2 billion in 1996.
Operating income was $1.1 billion and $611 million for 1995 and 1994,
respectively.
During 1996, Polyurethanes experienced record sales and profits,
fueled in part by strong demand in Latin America. To meet increasing
global demand, Dow's polyol facilities in Freeport, Texas and
Terneuzen, the Netherlands added 150 million pounds (68,000 metric
tons) of capacity through low-capital debottlenecking projects. The
business also added 100 million pounds (45,000 metric tons) of
diphenylmethane diisocyanate (MDI) capacity to meet demand which is
predicted to grow at about 6 percent per year.
Sales of Epoxy and Intermediate products were about flat with 1995
levels. Higher volume offset price declines caused by competitive
pressures in key markets. Improved productivity and lower
manufacturing costs yielded savings to the business and contributed to
record profitability despite pricing pressures.
Engineering Plastics experienced flat sales but higher operating
income in 1996 compared with the previous year. Prices softened for
ABS and polycarbonate in response to customer inventory reductions and
in anticipation of additional capacity coming on line in 1997.
Polycarbonate demand is forecasted to grow at above 5 percent per
annum in the coming years. To meet this growth, Dow will build a
second Calibre polycarbonate plant in Stade, Germany. The plant is
scheduled to start up in the first quarter of 1999. The company also
entered into a long-term agreement to supply DSM Engineering Plastics
with polycarbonate. By the first quarter of 1998, Dow will almost
double its production capacity at LaPorte, Texas for thermoplastic
polyurethane to meet growing demand in North America and Europe.
DuPont Dow Elastomers L.L.C. successfully started operations in
April 1996, combining Dow's Insite technology with DuPont's elastomer
business to form a $1 billion corporation. Dow also announced an
agreement with BP Chemicals to develop and make available for
licensing a combination of BP's Innovene gas-phase polyethylene
process and Dow's Insite technology.
The Adhesives, Sealants and Coatings business achieved record sales
and profits in 1996 on the strength of geographic expansion and
alignment with strategic customers. Rapid global expansion is
occurring in the Systems House polyurethane formulation business.
Operations were established in 1996 in Mexico, Poland and Egypt. In
1997, operations will begin in Brazil and China.
To capture growth in emerging economies, Essex Specialty Products,
a wholly owned subsidiary of Dow, began new commercial activities in
China and Korea in 1996. In 1997, expansion into Latin America, India
and Thailand will occur.
Fabricated Products posted record profits in 1996 on the strength
of volume increases which offset modest price declines. The price
declines were fueled by the entry of local competitors into regional
markets and the globalization of some competing manufacturers. Europe
had a particularly strong year, partially the result of successful
expansion into Eastern Europe and the Middle East. In Europe, two
Styrofoam brand housing insulation production plants were converted to
use a carbon dioxide blowing agent, making available a new line of
insulation material. In North America, first year sales of Duramate
insulation exceeded expectations.
-13-
PERFORMANCE PLASTICS (Continued)
Outlook for 1997
The Performance Plastics segment is expected to continue to generate
significant economic profit in the coming year.
Polyurethanes volume is anticipated to grow by about 6 percent in
1997; however, pricing pressure will be greater compared with the
previous year.
The Epoxy and Intermediates business is expected to grow at a
slightly higher rate than world GDP in 1997. Global competition will
likely lead to increased pricing pressures. However, prices in key
product areas such as epichlorohydrin should stabilize. The business
will continue its activities to secure a strong platform for future
growth in Asia Pacific and expand its position in Latin America.
Engineering Plastics anticipates another strong year with solid
volume growth. Pricing will continue to be a challenge for the
business, especially for polycarbonate and ABS resin.
The Adhesives, Sealants and Coatings business expects to experience
double-digit growth in 1997. The business will continue to explore
value-creating opportunities to leverage Dow's material science and
process capabilities with customers who wish to improve their
manufacturing and assembly activities.
Sales volume for Fabricated Products should increase as a result of
continued geographic expansion, especially into emerging markets. The
competitive market environment experienced in 1996 is expected to
continue into 1997, which will likely result in a slight price
decline.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals were $4.2 billion in 1996, flat with
$4.2 billion a year ago. Sales for 1994 were $3.7 billion. The segment
experienced a volume gain of 4 percent and a price decline of 4
percent in 1996 compared with a year ago.
Operating income was up 8 percent to a record-setting $721 million
from $670 million in 1995. In 1994, operating income was $514 million.
Emulsion Polymers posted flat sales and profits in 1996 compared
with the previous year, as higher volume was offset by lower prices.
The business continued its productivity drive in 1996, successfully
lowering manufacturing costs for the fifth consecutive year. Demand
for styrene butadiene (S/B) latex was soft in the first half of 1996
due to the paper industry's high inventories of coated paper, but
recovered in the latter half of the year with increased market
penetration. With some regional exceptions, global growth in the
carpet industry was flat. Pricing for S/B latex weakened primarily due
to declines in the prices of key raw materials.
Dow acrylic latex volumes grew in both North America and Europe,
based on broadening product acceptance in selected coatings and
adhesives applications.
Specialty Chemicals set records for sales and operating income.
Volume was up due to strong demand for superabsorbents, polyglycols
and oxygenated solvents. Prices softened somewhat due to competitive
pressures in superabsorbents and oxygenated solvents.
Many of the individual businesses within Specialty Chemicals
recorded sales and operating income records. These included: Methocel
cellulose ethers, oxygenated solvents, polyglycols, Versene chelants,
Gas/Spec solvents and services, quaternaries and
divinylbenzene/vinylbenzyl chloride (DVB/VBC).
Specialty Chemicals made a number of capacity additions and
portfolio changes during the year as the business continued to pursue
its goal of doubling its value by the year 2000. In March 1996,
diphenyl oxide (DPO) production technology was installed in Freeport,
Texas, yielding dramatic cost reductions. The new technology replaced
an older plant in Michigan which was shut down in the second quarter
of 1996. Plant capacity for DVB, which supplies the ion exchange
industry, was increased in response to global contracts. Methocel
cellulose ethers capacity was added in Europe and North America. The
Liquid Separations business underwent considerable restructuring
resulting in the consolidation of operations. The Gas Separation
business was sold in the first half of 1996 and the Acrylamide
Monomers business was restructured in the second quarter through a
technology transfer and contract manufacturing agreement with SNF
Floerger.
DowElanco, a global agricultural chemicals joint venture between
Dow and Eli Lilly, experienced its fifth consecutive year of record
profits. Increased competition in older products was offset by growth
in new technology products. During 1996, DowElanco took a major
strategic step by purchasing controlling equity interest in Mycogen, a
world leader in the development of Bt (Bacillus thuringiensis) insect-
resistant seed technology, thus increasing its participation in the
biotechnology sector.
Sales of DowElanco's Sentricon termite colony elimination system,
first commercially sold in 1995, achieved a seven-fold increase in
1996. The revolutionary system uses small amounts of chemical bait
only when termites are detected. It has been proven to eliminate
entire termite colonies and provides protection for structures around
the world.
The past year also saw the launch in Japan of Clincher, DowElanco's
new grass herbicide for rice, with extensions into other Asian
countries planned for 1997.
-14-
PERFORMANCE CHEMICALS (Continued)
Outlook for 1997
Performance Chemicals is expected to have another good year in 1997
with higher volume growth in each of its businesses.
Emulsion Polymers should experience above average volume growth
because of its low-cost position, success in supplying several new
coated paper machine start-ups and customers' increased acceptance of
Dow's acrylic latex family of products. The competitive environment
will remain challenging and prices are expected to soften.
Specialty Chemicals anticipates another good year based on
increased sales demand combined with ongoing productivity improvements
and business portfolio restructuring. The business will continue to
look for value-creating acquisitions that will help meet its growth
targets.
In 1997, DowElanco plans to launch its new Tracer insect control
product into the U.S. cotton industry, subject to Environmental
Protection Agency (EPA) registration. The first of a class of
chemicals derived from naturally occurring organisms, Tracer provides
effective control of caterpillars without harming beneficial insects,
making it an excellent fit for integrated pest management programs.
DowElanco expects to increase capacity for Tracer in 1997 to support a
global launch of the product.
PLASTICS
Plastics reported sales of $3.9 billion in 1996, down 2 percent from
the previous year. In 1994, sales were $3.1 billion. Volume increased
17 percent versus last year, largely offsetting a price decline of 19
percent. Sales were up in 1995 over 1994 due to a 29 percent increase
in prices. Strategic acquisitions in Latin America contributed to the
significant volume growth in 1996.
Operating income was $794 million versus $1.5 billion in 1995. In
1994, operating income was $531 million.
Dow's Polyethylene business saw significant volume growth in 1996.
Both the industry's and Dow's supply capabilities were balanced due to
a combination of high demand and planned and unscheduled plant
outages. Prices were down compared to the prior year. However, in the
fourth quarter of 1996 year-over-year price comparisons were
favorable, reflecting both the balanced supply situation as well as
higher feedstock costs.
The business continues to expand and upgrade existing assets to
meet global demand for products made via Dow's value-adding Insite
technology. A new 145-million-pound (66,000 metric ton) polyethylene
train came on line in June 1996, at Dow's Tarragona, Spain facility.
The train is dedicated to the production of materials made via Insite
technology and will manufacture Dow's new enhanced polyethylene (EPE)
when that product is launched in 1997. Additionally, Dow converted one
of its world scale trains in Plaquemine, Louisiana to be capable of
producing Insite technology based polyethylene resins.
Leveraging its low-cost feedstock position in Alberta, Canada, the
Polyethylene business announced that it will add a 550-million-pound
(250,000 metric ton) train to its manufacturing facility in Fort
Saskatchewan, Alberta. The expansion will bring the facility's total
capacity to more than 1.4 billion pounds (636,000 metric tons) per
year and will help Dow meet the projected annual global demand growth
for polyethylene of 6 percent. The new train will start production in
1998 or 1999.
As part of its strategy for capturing growth in emerging markets,
Dow will build its first Asian polyethylene production facility in
Thailand through a joint venture with the Siam Cement Group. The plant
will have a 660-million-pound (300,000 metric ton) capacity and is
expected to begin operations in 1999. The plant will be capable of
producing both traditional Dowlex as well as resins made via Insite
technology.
In 1996, Dow's Polystyrene business faced downward pricing
pressure, especially in Asia Pacific. This followed the 1995 peak of
the price cycle for polystyrene and styrene monomer. By year-end,
pricing had stabilized in most geographies, with most areas announcing
price increases in December for 1997 implementation. The business
experienced solid volume growth during 1996.
In September 1996, Dow acquired controlling interest in Estireno do
Nordeste (EDN). This makes Dow the largest polystyrene producer in
Latin America.
In Asia Pacific, Dow's joint venture with Asahi Chemical, Styron
Asia Limited, plans to build a world-scale polystyrene plant in China
at Zhangjiagang. The plant is expected to be operational by the year
2000.
Dow entered the polypropylene business in 1996 with the intent of
becoming a leading global supplier within ten years. The business
believes that product differentiation will be the key to its long-term
success and profitability and therefore has made a commitment to apply
Insite technology to the manufacture of polypropylene. Dow's entry
strategy includes the licensing of Spheripol process technology from
Technipol, a subsidiary of Montell Polyolefins, and supply agreements
with Montell. Dow's first polypropylene plant, with a 440-million-
pound (200,000 metric ton) capacity, will be built in Schkopau,
Germany at the BSL site and is expected to come on line in 1998. A
second plant will be built in Tarragona, Spain by the year 2000.
Global demand for PET remained strong during the year, although the
typical summer peak in demand did not materialize. In Europe, where
Dow is involved via its INCA subsidiary, PET industry demand increased
by 11 percent versus 1995. Despite the healthy demand, prices
decreased throughout the second and third quarter due to industry
overbuilding, imports from Asia, and customer de-stocking. INCA had a
successful year in PTA technology licensing.
-15-
PLASTICS (Continued)
Outlook for 1997
The economic indicators for 1997 point to continued strong demand for
polyethylene. Pricing is expected to be relatively stable against a
background of low customer inventories, higher feedstock prices and
new industry capacity additions scheduled for late in the year.
Increased demand and additional sales in Latin America through the
EDN privatization are expected to result in double-digit volume growth
for polystyrene in 1997.
Anticipated global demand growth for polypropylene in 1997 is
forecasted to exceed 1996 by 8 percent with steady growth in
traditional market applications as well as new development
opportunities.
Global demand for PET is expected to increase more than 10 percent
in 1997. The oversupply situation is not forecasted to improve
significantly. However, with demand picking up toward the end of 1996
and with low customer inventories, there are indications that prices
may improve during the first half of 1997. It is also expected that
the oversupply situation will lead to rationalization of PET
capacities and realignment within the industry.
Capacity additions in ethylene and styrene by year-end may create a
more challenging pricing environment for Plastics.
CHEMICALS AND METALS
Chemicals and Metals posted sales of $3.1 billion in 1996 compared to
$3.3 billion in 1995 and $2.5 billion in 1994. Prices declined 10
percent and volume rose 4 percent during the year.
Operating income was $737 million compared to $1.1 billion in 1995
and $337 million in 1994.
Stronger than expected volume growth for vinyl chloride monomer
(VCM) and solid growth for other chlorine derivatives pushed global
chlor-alkali industry operating rates to high levels. This resulted in
significant increases in chlorine values during 1996. Increasing
chlorine values, sustained ethylene values and robust demand led to a
rebound in vinyl chloride volumes and price from the last half of
1995. High global chlor-alkali operating rates, along with somewhat
reduced demand for caustic soda by the global pulp and paper industry,
led to declining caustic soda prices during 1996.
In the last quarter of 1996, Dow brought on line 440 million pounds
(200,000 metric tons) of chlorine capacity in Freeport, Texas and 260
million pounds (118,000 metric tons) in Stade, Germany. The Stade
expansion represents Dow's first commercial use of membrane cell
technology. The additional capacity meets Dow's increased internal
chlorine demand, supporting derivative businesses.
Dow's VCM capacity was increased by 440 million pounds (200,000
metric tons) in 1996 through an incremental expansion in Texas and
technology improvements at other locations. This increase allows Dow
to grow with the total market and satisfy increasing customer demand.
Propylene Oxide (PO) and Derivatives experienced significant volume
growth in North America, aided by a continued strong economy.
Propylene prices for the year were lower than in 1995. This lower raw
material cost, along with balanced supply and demand and stable market
prices for propylene glycol, enhanced the profitability of the
business. An additional 300 million pounds (136,000 metric tons) of PO
capacity was added at Freeport, Texas and Stade, Germany during 1996
to support strong derivative demand driven by growth in durable goods.
Chlorinated Organics saw pricing firm up for its chloromethane
products. Supply/demand began to move toward a better balance for
perchloroethylene and carbon tetrachloride late in 1996.
Magnesium and Fabricated Metals faced new competition from Israel,
China and Russia which continued to put downward pressure on prices.
The Cal/Mag business saw strong demand for Peladow calcium chloride
as users replenished inventories that were depleted during the harsh
winter last season. Prices have been strong.
Outlook for 1997
VCM and other chlorine derivatives are expected to continue to grow
significantly in the first half of 1997. Values for chlorine, ethylene
and vinyl chloride should remain stable during that same period.
Caustic soda prices will be significantly lower in the first half of
1997 than in 1996.
PO and Derivatives will face a difficult year with rising propylene
prices. However, continued cost and expense reductions will mitigate
these market factors. An additional 100 million pounds (45,000 metric
tons) of PO capacity will be added in Aratu, Brazil in the first
quarter of 1997.
Leveraging Dow's low cost Canadian ethylene position, Ethylene
Oxide (EO) and Derivatives plans to add 85 million pounds (39,000
metric tons) of EO and 125 million pounds (57,000 metric tons) of
ethylene glycol capacity in Fort Saskatchewan, Alberta in the fourth
quarter of 1997.
-16-
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales were up 3 percent to $2.4 billion
compared to 1995 and up 20 percent from $2 billion in 1994. This
segment experienced volume gains of 9 percent and price declines of 6
percent versus the previous year.
Hydrocarbons and Energy reported an operating loss of $57 million,
compared to an operating loss of $83 million in 1995. In 1994, the
segment posted operating income of $74 million.
The average crude oil price increased 17 percent over 1995, with
the increase taking place in the second half of 1996. As a result, the
cost of liquid feedstocks increased approximately 26 percent. Low
inventories and cold winter weather caused natural gas prices in the
U.S. Gulf Coast to rise. The combination of these factors caused
prices for light feedstocks (e.g., propane and ethane) to reach record
highs.
Dow's feedstock flexibility and global sourcing, including
maximizing its low-cost position in Canada, allowed the company to
optimize feedstock acquisition costs.
Ethylene markets recovered from a low at the end of 1995 with
improving industry operating rates which supported significant price
recovery through the year.
Spot styrene prices rose from their low position of the second half
of 1995. Global demand supported average industry operating rates of
around 90 percent. Capacity added in 1996 was readily absorbed by the
market, but the average pricing over the year reflected planned
capacity additions for 1997 and beyond.
In 1996, Dow finalized its acquisition of 63 percent of
Petroquimica Bahia Blanca (PBB) in Argentina. The acquisition includes
a 540-million-pound (245,000 metric ton) ethylene plant. In 1996, the
plant ran very well posting a new production record.
To optimize Dow's low-cost position in Canada, the ethylene unit in
Fort Saskatchewan, Alberta will be expanded to meet increased
downstream derivative demand. The additional capacity will come on
line in the fourth quarter of 1998.
During the year, Dow added 110 million pounds (50,000 metric tons)
of styrene capacity at its manufacturing facility in Terneuzen, the
Netherlands. In Thailand, the Dow/Siam Cement joint venture styrene
unit entered its start-up phase in December. The capacity of the unit
is in excess of 440 million pounds (200,000 metric tons). In addition,
Dow acquired a 330-million-pound (150,000 metric ton) styrene plant
through its purchase of controlling interest in Brazil's EDN.
In 1996, the company sold a portion of its stake in Oasis Pipeline
as part of its active portfolio management.
Independent power producer Destec Energy, Inc., a publicly traded
Dow subsidiary (about 80 percent owned), reported revenues for 1996 of
$578 million, compared with $641 million in 1995 and $727 million in
1994. Destec's 1996 earnings were up 23 percent, and cash flows from
operating activities and equity distributions increased 56 percent
compared to 1995.
Destec's 1996 results reflected the successful repositioning of its
business from a domestic-based power project developer to a global
developer, producer and marketer of power. Approximately one-third of
Destec's 1996 gross margin was contributed by its international
business. The operating facilities in which Destec owns an interest
also contributed greatly to increased earnings, as evidenced by a 57
percent increase in equity earnings for the year compared with 1995.
In October 1996, Destec announced that its Board of Directors had
retained Morgan Stanley & Co. to explore strategic alternatives to
maximize stockholder value, including a possible sale of Destec.
Outlook for 1997
Crude oil, energy and feedstock prices are expected to plateau in the
first half of 1997 and then begin to move down.
Ethylene demand is expected to grow steadily causing operating
rates to rise. This will lead to significant price increases and
improved margins. However, new ethylene capacity additions during the
latter part of 1997 may negatively affect operating rates and exert
downward pressure on prices.
The styrene industry is currently operating at high rates. Capacity
additions in Asia Pacific during 1997 are expected to lead to a
reduction in average industry operating rates, keeping global styrene
pricing near its present low level.
Dow's net global purchase positions in ethylene and styrene will
likely allow continuous full utilization of Dow's available capacity,
thus improving the relative cost position versus the industry
averages.
-17-
DIVERSIFIED BUSINESSES AND UNALLOCATED
Sales for this segment were $1.1 billion, $966 million, and $953
million in 1996, 1995 and 1994, respectively.
The segment posted an operating loss of $275 million, an $88
million improvement from the prior year. The operating loss in 1994
was $247 million. The operating results of this segment were comprised
primarily of research and other expenses related to new developmental
activities in New Businesses, severance cost and overhead cost
variances not allocated to other segments. The company's total
severance cost was $139 million of which $127 million was assigned to
this segment for 1996 compared with $181 million in 1995 and $124
million in 1994. Segment costs were partially offset by pretax income
from insurance and finance company operations and DowBrands.
DowBrands, Dow's consumer products affiliate, registered a
significant profit improvement. Sales in 1996 showed a decline due
primarily to the sale of the Personal Care business in November 1995.
The core North American Home Food Management business grew 9
percent versus the previous year. Improved capacity utilization and
reduced manufacturing costs had a positive profit impact.
In the Home Care products value center profitability improved
substantially due primarily to the re-launch of all specialty cleaners
under the Dow mega-brand strategy, the introduction of several new
products, the consolidation to the new Urbana, Ohio manufacturing site
and an aggressive cost control program.
Cofresco, a joint venture between DowBrands and Melitta Bentz KG,
was finalized in October, creating a leadership position in Home Food
Management across Europe. DowBrands also began an affiliation with
Asahi Chemical Industry Co., Ltd. in Japan. Asahi will import, market
and sell Ziploc brand plastic bags in Japan.
Radian International LLC, Dow's environmental services joint
venture, faced significant pricing pressure in 1996 which negatively
impacted its performance.
The New Businesses unit introduced new products for the electronics
industry including SCAN silica coated aluminum nitride and a ceramic
material for use in computer hard drives.
Outlook for 1997
DowBrands performance should continue to improve as a result of
restructuring which has created a leaner, more focused organization
with a clear growth strategy.
The environmental services industry will continue to operate in a
very competitive climate.
COMPANY SUMMARY
Operating Income
Operating income was $3.1 billion in 1996, down 20 percent from $3.9
billion in 1995 and increased 70 percent from $1.8 billion in 1994.
Gross margin decreased by $918 million versus 1995, primarily as a
result of lower selling prices and higher feedstock and energy costs.
<TABLE>
Sales Price and Volume
1996 1995 1994
- -----------------------------------------------------------------------------------------------
Percentage changes Price Volume Total Price Volume Total Price Volume Total
from prior year
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Geographic Areas:
United States (6)% 3% (3)% 12% - 12% 1% 7% 8%
Europe (11) 10 (1) 25 8% 33 4 8 12
Rest of World (8) 11 3 16 8 24 3 15 18
All Areas (8)% 7% (1)% 17% 4% 21% 3% 8% 11%
- -----------------------------------------------------------------------------------------------
Industry Segments:
Performance Plastics (4)% 3% (1)% 13% 5% 18% (1)% 11% 10%
Performance Chemicals (4) 4 - 6 9 15 (1) 9 8
Plastics (19) 17 (2) 29 (1) 28 12 10 22
Chemicals and Metals (10) 4 (6) 33 1 34 4 3 7
Hydrocarbons and Energy (6) 9 3 9 7 16 6 7 13
Diversified Businesses
and Unallocated 5 5 10 - 1 1 (2) 5 3
All Segments (8)% 7% (1)% 17% 4% 21% 3% 8% 11%
</TABLE>
-18-
OPERATING INCOME (Continued)
The ratio of operating income to sales was 15 percent in 1996,
versus 19 percent in 1995 and 11 percent in 1994. The decrease of $804
million in operating income for 1996 versus 1995 was due mainly to
approximately $2 billion in lower sales prices and higher feedstock
and energy costs that was partially offset by $1.2 billion impact of
volume growth, improved productivity, business portfolio restructuring
and lower costs. Operating income was reduced across all geographic
segments because the sales price decline was global. The United States
contributed 40 percent of the total operating income in 1996 compared
to 41 percent in 1995 and 56 percent in 1994. Operating income in
Europe was $783 million in 1996 versus $1.1 billion in 1995 and $237
million in 1994. Operating income from Rest of World was $1.1 billion
in 1996, down from $1.2 billion in 1995 and up from $559 million in
1994.
Operating Costs and Expenses
Cost Components as a Percent of Total 1996 1995 1994
- ------------------------------------------------------------------------
Hydrocarbons and energy 28% 25% 26%
Wages, salaries and employee benefits 21 21 22
Maintenance 4 5 6
Depreciation 7 8 8
Supplies, services and other raw materials 40 41 38
- ------------------------------------------------------------------------
Total 100% 100% 100%
Dow's global plant operating rate was 89 percent of capacity, down
from 92 percent in 1995 and 1994. The 1996 sales volume growth of 7
percent over 1995 was achieved through a mixture of new capacity and
sustained growth across all segments. Depreciation expense was $1.3
billion in 1996, $1.4 billion in 1995 and $1.2 billion in 1994.
Research and development, promotion and advertising, and selling
and administrative expenses of $2.9 billion in 1996 decreased $98
million from $3.0 billion in 1995 and increased $109 million from $2.8
billion in 1994. The decrease of 1996 from 1995 reflected Dow's
ongoing drive to improve productivity.
Research and development expenses were $761 million for 1996, down
6 percent compared with 1995 and down 3 percent compared with 1994.
Promotion and advertising expenses of $370 million were down 11
percent from $416 million in 1995 and down 10 percent from $411
million in 1994.
Selling and administrative expenses for 1996 were $1.8 billion,
flat with 1995 and up 11 percent from $1.6 billion in 1994. The
increase in 1995 over 1994 was primarily the result of variable
compensation increase based on the improved company earnings and the
negative impact of exchange rate changes on expenses incurred outside
the U.S. Selling and administrative expenses represented 9 percent of
sales in 1996 and 1995 versus 10 percent in 1994.
The personnel count was 40,289 at December 31, 1996, 39,537 at the
end of 1995 and 53,730 at the end of 1994. The large reduction from
1994 reflected the sale of Dow's pharmaceutical businesses. The
increase in 1996 over 1995 included the impacts of new acquisitions
which increased the personnel census by approximately 3,100. Taking
these two factors into account, the personnel count has shown a
substantial reduction in each year due to continuing rationalization
and work process improvements throughout the company.
Net Income
Net income available for common stockholders in 1996 was $1.9 billion
or $7.71 per share compared with $2.1 billion or $7.72 per share in
1995, and $931 million or $3.37 per share in 1994.
The following table summarizes the impact of special items on
earnings per common share:
1996 1995 1994
- -----------------------------------------------------------------------
Impact of Dow Corning Corporation
related charges - $(1.24) $ (.25)
Discontinued operations - .69 60
Other earnings $ 7.71 8.27 3.02
- ------------------------------------------------------------------------
Net earnings per common share $ 7.71 $ 7.72 $ 3.37
- ------------------------------------------------------------------------
-19-
NET INCOME (Continued)
Dow's share of the earnings of 20%-50% owned companies amounted to
$66 million compared with $70 million in 1995 and $29 million in 1994.
The company has not recorded its share of equity earnings in Dow
Corning since the first quarter of 1995 due to Dow Corning's filing
for protection under Chapter 11 and the company's write-down of its
investment as discussed below. Dow Corning reported net losses of $7
million in 1994 which reflected after tax charges against income
related to breast implant litigation of $152 million. The negative
impact of these charges on Dow's net income was $70 million or 25
cents per share in 1994. See Note Q to the Financial Statements for
further discussion of breast implant litigation.
Interest expense (including capitalized interest) and amortization
of debt discount increased $60 million to $494 million in 1996, up 14
percent from $434 million in 1995 and up 36 percent from $362 million
in 1994. The apparent increase in 1996 compared with 1995 and 1994 was
primarily due to the apportionment of interest to discontinued
operations in the 1995 and 1994 results (see Note C to the Financial
Statements).
Interest income and foreign exchange-net in 1996 was flat at $286
million in 1996 compared to $289 million in 1995, an increase of $188
million versus $98 million in 1994. The gain in 1996 and 1995 versus
1994 was primarily attributable to the investment of the cash received
from the sale of the pharmaceutical businesses. For a discussion of
the company's risk management program for both foreign currency and
interest rate risk, see Note J to the Financial Statements.
The loss on investments of $330 million in 1995 was due to the
company's write-down of its investment in Dow Corning as a result of
Dow Corning's decision to file for Chapter 11 (see Note Q to the
Financial Statements). In 1994, Dow recorded a loss on investments of
$42 million. The loss was due to a $132 million pretax charge related
to the pending sale of the Personal Care business of DowBrands.
Partially offsetting this charge was a pretax gain of $90 million
recorded by the company on the sale of its common shares of Magma
Power Company, primarily as a result of the merger agreement between
Magma and California Energy Company, Inc. Acquisitions and
divestitures are discussed in Note C to the Financial Statements.
Sundry income increased to $343 million in 1996 versus $43 million
in 1995 and $83 million in 1994. During 1996, Dow sold or restructured
its interest in a number of businesses, including Boride Products,
Crestar Energy, and Cynara. In addition, the company realized a pretax
gain of $120 million for the year through the sale of a portion of its
ownership in Oasis Pipeline.
The provision for taxes on income was $1.2 billion in 1996 versus
$1.4 billion in 1995 and $654 million in 1994. Dow's overall effective
tax rate for 1996 was 36.1 percent versus 40.9 percent for 1995 and
40.2 percent for 1994. The underlying factors affecting Dow's overall
effective tax rates are discussed in Note D to the Financial
Statements. U.S. and other tax law and rate changes during the year
did not have a material impact on Dow.
Minority interests' share of net income in 1996 was $194 million
compared with $196 million in 1995 and $200 million in 1994 (see Note
K to the Financial Statements).
Discontinued operations accounted for an after tax gain of $187
million in 1995, $169 million of which resulted from the sale of Dow's
shares of Marion Merrell Dow Inc. to Hoechst A.G. for $5.1 billion and
the sale of the company's Latin American pharmaceutical businesses to
Roussel Uclaf S.A. for $133 million in the second quarter of 1995. A
further $18 million income after tax was earned from the operations of
the pharmaceutical businesses in the first quarter of 1995. Provision
for taxes related to discontinued operations was $418 million, $382
million on the sale and $36 million from operations. The income, net
of taxes, from discontinued operations in 1994 was $166 million with
provision for taxes of $125 million (see Note C to the Financial
Statements).
Dividends
The Board of Directors has announced a quarterly dividend of 75 cents
per share, payable April 30, 1997 to stockholders of record on March
31, 1997. This will be the 341st consecutive quarterly dividend since
1912. Dow has maintained or increased the dividend throughout that
time. The company declared dividends of $3.00 per share in 1996, $2.90
per share in 1995 and $2.60 per share in 1994.
-20-
Environment
Dow's global operations are subject to increasingly stringent laws and
government regulations related to environmental protection and
remediation. Dow's environmental responsibilities and potential
liabilities receive direct and ongoing scrutiny by management to
ensure compliance with these laws and regulations. Dow's Environmental
Management Standard clearly defines the overall environmental
management system, performance objectives and design requirements
needed to minimize the long-term cost of environmental protection as
well as to comply with these laws and regulations. This standard was
reviewed, revised and re-communicated throughout the organization in
1995. It is Dow's stated policy that all global operations and
products meet Dow's Environmental Management Standard or their
country's laws and regulations, which-ever is more stringent.
Assessments are used by management to continually measure and report
Dow's progress against this standard and its performance objectives.
It has been Dow's policy to adhere to a waste management hierarchy
that minimizes the impact of wastes and emissions on the environment.
First, Dow works to eliminate or minimize the generation of waste and
emissions at the source through research, process design, plant
operations and maintenance. Second, Dow finds ways to reuse and
recycle materials. Finally, unusable or non-recyclable hazardous waste
is treated before disposal to eliminate or reduce the hazardous nature
and volume of the waste. Treatment may include destruction by
chemical, physical, biological or thermal (incineration) means.
Disposal of waste materials in landfills is considered only after all
other options have been thoroughly evaluated. Dow has specific
requirements for wastes that are transferred to non-Dow facilities.
Wastes that are recycled, treated or recovered for energy off-site
represent less than 1 percent of the total amount of wastes reported
as part of the Pollution Prevention Act.
Dow's policy of treating its wastes on-site has resulted in less
than 10 percent of its total environmental liability being directed at
remediation under federal or state "Superfund" statutes. Dow's focused
approach to waste and emission reduction resulted in achieving its
public commitment to reduce global emissions of 17 priority compounds
(as defined by the U.S. Environmental Protection Agency's 33/50
program) and emissions of an expanded list of compounds (defined by
each geographic area) by 50 percent by 1995 (1988 base year). Global
reductions of 65 percent and 53 percent, respectively, were achieved
one year ahead of schedule in 1994. In 1996, Dow announced a number of
voluntary global environment, health and safety (EH&S) goals for the
year 2005. Included are goals to reduce emissions and wastes by 50
percent (1994 base year) and EH&S incidents by 90 percent. After two
years, the company appears to be on track to achieving these goals.
All of the goals, as well as other performance data, can be found in
Dow's 1996 EH&S progress report.
In December 1996, Raven Group Ltd. (Raven) was formed to manage
certain of the company's environmental remediation projects. Dow owns
85 percent of the joint venture and The EOP Group, Inc., an
environmental consulting firm, owns the remaining 15 percent. Raven
will be responsible for providing strategic management to identify
cost-effective remediation solutions at Dow's U.S. manufacturing
facilities.
The costs of site remediation are accrued as a part of the shutdown
of a facility or, in the case of a landfill, over its useful life. The
nature of such remediation includes the cleanup of soil contamination
and the closure of landfills and other waste management facilities.
The policies adopted to reflect properly the monetary impacts of
environmental matters are discussed in Note A to the Financial
Statements. To assess the impact on the financial statements,
environmental experts review currently available facts to evaluate the
probability and scope of potential liabilities. Inherent uncertainties
exist in such evaluations primarily due to unknown conditions,
changing governmental regulations and legal standards regarding
liability, and evolving technologies for handling site remediation and
restoration. These liabilities are adjusted periodically as
remediation efforts progress or as additional technical or legal
information becomes available.
Dow has been named as a potentially responsible party (PRP) under
federal or state Superfund statutes at approximately 55 sites. Dow
readily cooperates in remediation at sites where its liability is
clear, thereby minimizing legal and administrative costs. However, at
several of these Superfund sites, Dow has had no known involvement and
is contesting all liability; at many others, Dow disputes major
liability, believing its responsibility to be de minimis. Because
current law imposes joint and several liability upon each party at a
Superfund site, Dow has evaluated its potential liability in light of
the number of other companies which have also been named PRPs at each
site, the estimated apportionment of costs among all PRPs and the
financial ability and commitment of each to pay its expected share.
Management has estimated that the company's probable liability for
the remediation of Superfund sites at December 31, 1996 was $15
million, which has been accrued. In addition, receivables of $17
million for probable third-party recoveries have been recorded related
to these sites. Other recoveries for past expenditures are possible
since Dow has numerous insurance policies secured from many carriers
at various times that may provide coverage at different levels for
environmental liabilities. The company is currently involved in
litigation to determine the scope and extent of such coverage. Dow has
not recorded any receivables for these possible recoveries.
In addition to the Superfund-related liability referenced above,
Dow had an accrued liability of $250 million at December 31, 1996
representing the total probable costs that the company could incur
related to the remediation of current or former Dow-owned sites. The
company had not recorded as a receivable any third-party recovery
related to these sites.
-21-
ENVIRONMENT (Continued)
In total, Dow's accrued liability for probable environmental
remediation and restoration costs was $265 million at December 31,
1996, as compared with $275 million at the end of 1995. This is
management's best estimate of these liabilities, although possible
costs for environmental remediation and restoration could range up to
twice that amount.
The amounts charged to income on a pretax basis related to
environmental remediation totaled $60 million in 1996, $89 million in
1995 and $64 million in 1994. Capital expenditures for environmental
protection were $80 million in 1996, $80 million in 1995 and $103
million in 1994 and they are currently projected at $100 million in
1997 and $100 million in 1998.
It is the opinion of the company's management that the possibility
is remote that costs in excess of those accrued or disclosed will have
a material adverse impact on the company's consolidated financial
statements.
Capital Expenditures
Capital spending for the year was $1.3 billion, down 5 percent from
$1.4 billion in 1995 and up 14 percent from $1.2 billion in 1994.
Capital spending in 1994 included spending in pharmaceuticals of $109
million. In 1996, approximately 34 percent of the company's capital
expenditures was directed toward additional capacity for new and
existing products, while about 8 percent was committed to projects
related to environmental protection, safety and loss prevention, and
industrial hygiene. The remaining capital was utilized to maintain the
company's existing asset base, including projects related to
productivity improvements, energy conservation and facilities support.
Major projects underway during 1996 included a new facility in Harbor
Beach in the U.S. to produce Tracer insect control product; tie-ins to
a new energy co-generation facility in Terneuzen, the Netherlands; a
new aniline facility in Boehlen, Germany; an expansion of the VCM
facilities in Fort Saskatchewan, Canada; and a membrane chlorine
expansion in Stade, Germany. Because the company designs and builds
most of its capital projects in-house, it had no major capital
commitments, other than for the purchase of materials from
fabricators.
Liquidity and Capital Resources
Operating activities provided $3.4 billion in cash in 1996, as
compared with $3.3 billion in 1995 and $2.7 billion in 1994 (see the
Consolidated Statements of Cash Flows). The items affecting operating
activities are discussed in the operating income and net income
analyses. Investing activities used $2.2 billion cash in 1996,
provided $2.9 billion in 1995 and used $1.3 billion in 1994. The
difference of $5.1 billion cash between 1995 and 1996 was due to the
sale of the pharmaceutical businesses in 1995. This sale of Marion
Merrell Dow Inc. (MMDI) to Hoechst A.G. in 1995 for $5.1 billion had a
very positive effect on the liquidity and capital resources of the
company.
Total working capital at year-end was $3.8 billion versus $5.0
billion at the end of 1995. Cash, cash equivalents, marketable
securities and interest-bearing deposits decreased by $1.1 billion,
which can be attributed to the company's ongoing share repurchase
program. Inventories and trade receivables increased $323 million in
1996. Days-sales-in-inventory, however, were down 3 days to 87 days,
versus 90 days in 1995 and increased 7 days versus 80 days in 1994.
Days-sales-outstanding-in-receivables were 45 days, 47 days and 52
days for 1996, 1995 and 1994, respectively.
Short-term borrowings at December 31, 1996 were $665 million, an
increase of $342 million from year-end 1995. Long-term debt due within
one year increased $232 million to $607 million at the end of 1996
compared with $375 million at the end of 1995. Long-term debt due in
1997 will be funded by operating cash flows. Accounts payable
increased by $74 million to $2.3 billion and income taxes payable
decreased $224 million during the year.
Long-term debt was $4.2 billion, a decrease of $509 million from
year-end 1995. During the year, $298 million of new long-term debt was
incurred while $733 million was transferred to long-term debt due
within one year. $586 million of long-term debt was retired during
1996.
Total debt was $5.5, $5.4 and $6.6 billion at December 31, 1996,
1995 and 1994, respectively. Net debt, which equals total debt less
cash, cash equivalents, marketable securities and interest-bearing
deposits, was $3.2, $2.0 and $5.4 billion at December 31, 1996, 1995
and 1994, respectively. The debt to total capitalization ratio
decreased to 35 percent at year-end 1996 from 36 percent at the end of
1995 and 38 percent at the end of 1994.
In 1995 and 1996, the Board of Directors authorized the repurchase
of the company's common stock. Due to the cash received from the sale
of the pharmaceutical businesses and the continued strong cash flow
provided by operating activities, $1.2 billion worth of common stock
was purchased in 1996 and $2.1 billion in 1995 versus $38 million in
1994 (see Note L to the Financial Statements).
The company has unused and available credit facilities with various
U.S. and foreign banks totaling $1.9 billion in support of its working
capital requirements and commercial paper borrowings. Additional
unused credit facilities totaling $1.4 billion are available for use
by foreign subsidiaries.
At December 31, 1996, there was a total of $1.4 billion in
available SEC registered debt securities between Dow and Dow Capital
plc., a wholly owned subsidiary, and 50 billion in available Japanese
yen (approximately $430 million) registered with Japan's Ministry of
Finance.
-22-
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Minority interest in subsidiary companies increased during the year
from $1.8 billion in 1995 to $2.1 billion at the end of 1996, mainly
as a result of acquisitions as discussed in Note C to the Financial
Statements.
The company's strong position of $2.3 billion in cash, cash
equivalents, marketable securities and interest-bearing deposits, will
support its involvement in new acquisitions and joint ventures (see
Note C to the Financial Statements). Cash may also be required to
redeem the partners' capital accounts in DowBrands L.P.; either the
company or the outside investors can make this event occur (see Note K
to the Financial Statements). In addition, Eli Lilly holds a put
option which could require the company to purchase Eli Lilly's 40
percent interest in DowElanco (see Note Q to the Financial
Statements).
Subsequent Event
Dow announced on February 18, 1997 that it has agreed, subject to
regulatory approvals, to the merger of Destec Energy, Inc. and NGC
Corporation. More than 80 percent of Destec's shares (45 million) are
currently held by Dow. Under the agreement, NGC will acquire Destec
for $21.65 in cash for each outstanding share of Destec common stock.
Following the merger, Destec will become a wholly owned subsidiary of
NGC.
This action is consistent with Dow's strategy to maximize
shareholder value through the divestment of assets that do not fit its
long-term strategic objectives. Destec is a major, worldwide
independent power developer, producer, and marketer which will fit
strategically with NGC's existing energy focus. Dow plans to use the
majority of the proceeds from this sale for continued stock
repurchases.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Responsibility for Financial Statements and Independent Auditors' Report
- ---------------------------------------------------------------------------
Management Statement of Responsibility
The management of The Dow Chemical Company and its subsidiaries
prepared the accompanying consolidated financial statements, and has
responsibility for their integrity, objectivity and freedom from
material misstatement or error. These statements were prepared in
accordance with generally accepted accounting principles. The financial
statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information
in this annual report and is responsible for its accuracy and
consistency with the financial statements. The Board of Directors,
through its Audit Committee, assumes an oversight role with respect to
the preparation of the financial statements.
Management recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according
to the highest standards of personal and corporate conduct. Management
has established and maintains an internal control structure that
provides reasonable assurance as to the integrity and reliability of
the financial statements, the protection of assets from unauthorized
use or disposition, and the prevention and detection of fraudulent
financial reporting.
The internal control structure provides for appropriate division of
responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. Management
continually monitors internal controls for compliance. The Company
maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends
possible improvements.
Deloitte & Touche LLP, independent auditors, with direct access to
the Board of Directors through its Audit Committee, have audited the
consolidated financial statements prepared by the Company, and their
report follows.
Management has considered recommendations from the internal auditors
and Deloitte & Touche LLP concerning the internal control structure and
has taken actions that are cost-effective in the circumstances to
respond appropriately to these recommendations. Management further
believes the controls are adequate to accomplish the objectives
discussed herein.
- ---------------------------------------------------------------------------
Independent Auditors' Report
To the Stockholders and Board of Directors of
The Dow Chemical Company:
We have audited the accompanying consolidated balance sheets of The Dow
Chemical Company and its subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedule
listed at Item 14(a)2. These financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The Dow
Chemical Company and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Midland, Michigan
February 12, 1997
-24-
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
In millions, except for per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $20,053 $20,200 $16,742
Operating Costs and Expenses
Cost of sales 14,108 13,337 12,131
Insurance and finance company
operations, pretax income (78) (61) (40)
Research and development expenses 761 808 783
Promotion and advertising expenses 370 416 411
Selling and administrative expenses 1,766 1,771 1,594
Amortization of intangibles 39 38 43
-------------------------------------------------------------------------
Total operating costs and expenses 16,966 16,309 14,922
- ----------------------------------------------------------------------------
Operating Income 3,087 3,891 1,820
- ----------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of
20%-50% owned companies 66 70 29
Interest expense and amortization of debt discount (494) (434) (362)
Interest income and foreign exchange-net 286 289 98
Net loss on investments - (330) (42)
Sundry income-net 343 43 83
-------------------------------------------------------------------------
Total other income (expense) 201 (362) (194)
- ----------------------------------------------------------------------------
Income before Provision for Taxes
on Income and Minority Interests 3,288 3,529 1,626
- ----------------------------------------------------------------------------
Provision for Taxes on Income 1,187 1,442 654
- ----------------------------------------------------------------------------
Minority Interests' Share in Income 194 196 200
- ----------------------------------------------------------------------------
Preferred Stock Dividends 7 7 7
- ----------------------------------------------------------------------------
Income from Continuing Operations 1,900 1,884 765
Discontinued Operations
Income from pharmaceutical businesses,
net of taxes on income - 18 166
Gain on sale of pharmaceutical businesses,
net of taxes on income - 169 -
- ----------------------------------------------------------------------------
Net Income Available for Common Stockholders $1,900 $2,071 $931
- ----------------------------------------------------------------------------
Average Common Shares Outstanding 246.3 268.2 276.1
- ----------------------------------------------------------------------------
Earnings per Common Share from Continuing Operations $7.71 $7.03 $2.77
Earnings per Common Share $7.71 $7.72 $3.37
Common Stock Dividends Declared per Share $3.00 $2.90 $2.60
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-25-
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31
In millions 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $1,903 $2,839
Marketable securities and interest-bearing deposits 399 611
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1996, $71; 1995, $53) 2,985 2,729
Other 1,411 1,380
Inventories:
Finished and work in process 2,267 2,197
Materials and supplies 548 551
Deferred income tax assets-current 317 247
-------------------------------------------------------------------------
Total current assets 9,830 10,554
- ----------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,387 848
Other investments 2,060 1,558
Noncurrent receivables 437 314
-------------------------------------------------------------------------
Total investments 3,884 2,720
- ----------------------------------------------------------------------------
Property
Property 23,737 23,218
Less accumulated depreciation 15,253 15,105
-------------------------------------------------------------------------
Net property 8,484 8,113
- ----------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization-
1996, $177; 1995, $177) 899 658
Deferred income tax assets-noncurrent 669 779
Deferred charges and other assets 907 758
-------------------------------------------------------------------------
Total other assets 2,475 2,195
- ----------------------------------------------------------------------------
Total Assets $24,673 $23,582
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-26-
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
<CAPTION>
December 31
In millions, except for share amounts 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------
Current Liabilities
Notes payable $665 $323
Long-term debt due within one year 607 375
Accounts payable:
Trade 1,596 1,529
Other 724 717
Income taxes payable 567 791
Deferred income tax liabilities-current 64 55
Dividends payable 184 192
Accrued and other current liabilities 1,597 1,619
-------------------------------------------------------------------------
Total current liabilities 6,004 5,601
- ----------------------------------------------------------------------------
Long-Term Debt 4,196 4,705
- ----------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 1,005 659
Pension and other postretirement benefits-noncurrent 1,896 1,880
Other noncurrent obligations 1,493 1,260
-------------------------------------------------------------------------
Total other noncurrent liabilities 4,394 3,799
- ----------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,091 1,775
- ----------------------------------------------------------------------------
Temporary Equity
Temporary equity-other - 313
Preferred stock (authorized 250,000,000 shares of $1.00 par
value each; issued Series A-1996: 1,482,309; 1995:
1,521,175) at redemption value 128 131
Guaranteed ESOP obligation (94) (103)
-------------------------------------------------------------------------
Total temporary equity 34 341
- ----------------------------------------------------------------------------
Stockholders' Equity
Common stock (authorized 500,000,000 shares of $2.50 par
value each; issued 1996 and 1995: 327,125,854) 818 818
Additional paid-in capital 307 315
Retained earnings 11,323 10,159
Unrealized gains on investments 192 62
Cumulative translation (363) (349)
Minimum pension liability (22) -
Treasury stock, at cost (shares 1996: 85,986,616;
1995: 76,168,614) (4,301) (3,644)
-------------------------------------------------------------------------
Net stockholders' equity 7,954 7,361
- ----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $24,673 $23,582
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-27-
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
In millions 1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
Common Stock
Balance at beginning and end of year $818 $818 $818
- ----------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year 315 326 366
Issuance of treasury stock at less than cost (21) (27) (40)
Proceeds from sales of put options 13 16 -
-------------------------------------------------------------------------
Balance at end of year 307 315 326
- ----------------------------------------------------------------------------
Retained Earnings
Balance at beginning of year 10,159 8,857 8,645
Net income 1,907 2,078 938
Common stock dividends declared (736) (769) (719)
Preferred stock dividends declared (7) (7) (7)
-------------------------------------------------------------------------
Balance at end of year 11,323 10,159 8,857
- ----------------------------------------------------------------------------
Unrealized Gains (Losses) on Investments
Balance at beginning of year 62 (21) 105
Unrealized gains (losses) 130 83 (126)
-------------------------------------------------------------------------
Balance at end of year 192 62 (21)
- ----------------------------------------------------------------------------
Cumulative Translation
Balance at beginning of year (349) (330) (304)
Translation adjustments (14) (19) (26)
-------------------------------------------------------------------------
Balance at end of year (363) (349) (330)
- ----------------------------------------------------------------------------
Minimum Pension Liability
Balance at beginning of year - - -
Adjustments (22) - -
-------------------------------------------------------------------------
Balance at end of year (22) - -
- ----------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (3,644) (1,438) (1,596)
Purchases (1,243) (2,115) (38)
Reclassification related to put options 313 (313) -
Issuance to employees and employee plans 273 222 196
-------------------------------------------------------------------------
Balance at end of year (4,301) (3,644) (1,438)
- ----------------------------------------------------------------------------
Net Stockholders' Equity $7,954 $7,361 $8,212
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-28-
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
In millions 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Income from Continuing Operations $1,900 $1,884 $765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,298 1,442 1,302
Provision for deferred income tax 306 268 41
Undistributed earnings of 20%-50%
owned companies (29) (35) (17)
Minority interests' share in income 194 196 200
Net loss on investments - 330 42
Net gain on sales of property (11) (24) (73)
Other net (67) (99) (69)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (53) (311) (612)
Inventories 123 (369) (245)
Accounts payable (54) 15 456
Other assets and liabilities (208) (40) 689
Operating activities related to
discontinued operations - 84 250
-------------------------------------------------------------------------
Cash provided by operating activities 3,399 3,341 2,729
- ----------------------------------------------------------------------------
Investing Activities
Purchases of property (1,344) (1,417) (1,074)
Proceeds from sales of property 126 107 108
Purchases of consolidated companies (409) (10) -
Proceeds from sale of pharmaceutical businesses-net - 5,060 -
Investments in unconsolidated affiliates (652) (325) (43)
Proceeds from sales of unconsolidated affiliates 209 - 135
Purchases of investments (2,289) (2,260) (1,419)
Proceeds from sales of investments 2,160 1,751 1,223
Investing activities related to
discontinued operations - (28) (219)
-------------------------------------------------------------------------
Cash provided by (used in) investing activities (2,199) 2,878 (1,289)
- ----------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 50 (390) (29)
Proceeds from issuance of long-term debt 298 247 100
Payments on long-term debt (586) (951) (340)
Purchases of treasury stock (1,243) (2,115) (38)
Proceeds from sales of common stock 255 158 110
Distributions to minority interests (155) (155) (187)
Dividends paid to stockholders (749) (766) (723)
Financing activities related to
discontinued operations - 16 (170)
-------------------------------------------------------------------------
Cash used in financing activities (2,130) (3,956) (1,277)
- ----------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (6) 7 (1)
- ----------------------------------------------------------------------------
Summary
Increase (decrease) in cash and cash equivalents (936) 2,270 162
Cash and cash equivalents at beginning of year 2,839 569 407
-------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,903 $2,839 $569
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-29-
</TABLE>
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
Table of Contents
Page
A Summary of Significant Accounting Policies 30
B Accounting Change 32
C Acquisitions and Divestitures 32
D Taxes on Income 34
E Inventories 35
F Related Company Transactions 35
G Property 35
H Leased Properties 35
I Notes Payable, Long-Term Debt and Available Credit Facilities 36
J Financial Instruments 38
K Limited Partnerships 40
L Stockholders' Equity 40
M Stock Compensation Plans 41
N Redeemable Preferred Stock 42
O Pension Plans 43
P Other Postretirement Benefits 44
Q Commitments and Contingent Liabilities 45
R Supplementary Information 47
S Industry Segments and Geographic Areas 47
A Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of The Dow Chemical
Company and its subsidiaries (the Company) include the assets,
liabilities, revenues and expenses of all majority-owned subsidiaries
for which control is other than temporary. Intercompany transactions
and balances are eliminated in consolidation. Investments in companies
20%-50% owned (related companies) are accounted for on the equity
basis.
Certain reclassifications of prior years' amounts have been made to
conform to the presentation adopted for 1996.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company's financial statements include
amounts that are based on management's best estimates and judgments.
Actual results could differ from those estimates.
Earnings per Common Share
The calculation of earnings per share is based on the weighted average
number of common shares outstanding during the applicable period.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
Foreign Currency Translation
The local currency has been primarily used as the functional currency
throughout the world. Translation gains and losses of those operations
that use local currency as the functional currency, and the effects of
exchange rate changes on transactions designated as hedges of net
foreign investments, are included as a separate component of
stockholders' equity. Where the U.S. dollar is used as the functional
currency, foreign currency gains and losses are reflected in income
currently.
-30-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
A Summary of Significant Accounting Policies (Continued)
Financial Instruments
Interest differentials on swaps and forward rate agreements designated
as hedges of exposures to interest rate risk are recorded as
adjustments to expense over the contract periods. Premiums for early
termination of interest derivatives designated as hedges are amortized
as adjustments to expense over the original contract periods. Interest
derivatives not designated as hedges are marked-to-market at the end of
each accounting period.
Forward points on foreign exchange forward contracts designated as
hedges of foreign exchange risk are amortized over the lives of the
contracts. Foreign exchange contracts not designated as hedges are
marked-to-market at the end of each accounting period.
The Company calculates the fair value of financial instruments using
quoted market prices whenever available. When quoted market prices are
not available for various types of financial instruments (such as
forwards, options, swaps, etc.), the Company uses standard pricing
models which take into account the present value of estimated future
cash flows. Investments in debt and marketable equity securities are
classified as either Trading, Available-for-Sale or Held-to-Maturity.
Investments classified as Trading are reported at fair value with
unrealized gains and losses included in income. Investments classified
as Available-for-Sale are reported at fair value with unrealized gains
and losses recorded in a separate component of stockholders' equity.
Investments classified as Held-to-Maturity are recorded at amortized
cost.
The cost of investments sold is determined by specific identification.
Property, Investments and Other Assets
Land, buildings and equipment, including property under capital lease
agreements, are carried at cost less accumulated depreciation.
Depreciation is based on the estimated service lives of depreciable
assets and is generally provided using the declining balance method.
Fully depreciated assets are retained in property and depreciation
accounts until they are removed from service. In the case of disposals,
assets and related depreciation are removed from the accounts and the
net amounts, less proceeds from disposal, are charged or credited to
income.
The excess of the cost of investments in subsidiaries over the values
assigned to assets and liabilities acquired is shown as goodwill, which
is amortized on a straight-line basis over its estimated useful life
with a maximum of 40 years.
The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
When it is probable that undiscounted future cash flows will not be
sufficient to recover an asset's carrying amount, the asset is written
down to its fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to
sell.
Inventories
Inventories are stated at the lower of cost or market. The method of
determining cost is used consistently from year to year at each
subsidiary and varies among the last-in, first-out (LIFO) method; the
first-in, first-out (FIFO) method; and the average cost method.
Environment
Accruals for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can
be reasonably estimated, based on current law and existing
technologies. These accruals are adjusted periodically as assessment
and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities
are generally included in the balance sheet as "Other noncurrent
obligations" at undiscounted amounts. Accruals for related insurance
or other third party recoveries for environmental liabilities are
recorded when it is probable that a recovery will be realized, and are
included in the balance sheet as "Noncurrent receivables."
Environmental costs are capitalized if the costs extend the life of
the property, increase its capacity, and/or mitigate or prevent
contamination from future operations. Costs related to environmental
contamination treatment and cleanup are charged to expense.
-31-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
A Summary of Significant Accounting Policies (Continued)
Taxes on Income
The Company accounts for taxes on income using the asset and liability
method wherein deferred tax assets and liabilities are recognized for
the future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities using enacted
rates.
Annual tax provisions include amounts considered sufficient to pay
assessments that may result from examinations of prior year tax
returns; however, the amount ultimately paid upon resolution of issues
raised may differ from the amounts accrued. Provision is made for taxes
on undistributed earnings of foreign subsidiaries and related companies
to the extent that such earnings are not deemed to be permanently
invested.
Certain countries provide tax incentives which are granted to
encourage new investment. Generally, such tax incentives are credited
to income as earned.
B Accounting Change
As permitted under Statement of Financial Accounting Standards (SFAS)
No. 123 (Accounting for Stock-Based Compensation), the Company has
continued to apply Accounting Principles Board (APB) Opinion No. 25
(Accounting for Stock Issued to Employees) and has included disclosures
of the pro forma impact on net income of the application of the fair
value based method of accounting (see Note M).
In 1996, the Company adopted SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of), which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of this new standard had no
material impact on the Company's financial statements.
In May 1996, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on Issue No. 96-11
(Accounting for Forward Contracts and Purchased Options to Acquire
Securities Covered by SFAS No. 115). As a result, the Company began to
account for its warrants to purchase 7.5 million shares of Schlumberger
Limited stock at fair value as available-for-sale securities. The
impact of adopting this consensus was to increase the carrying value of
the warrants by $136, in the quarter of adoption, with a corresponding
increase in "Unrealized gains on investments" in Stockholders Equity
(net of deferred taxes of $52).
C Acquisitions and Divestitures
In April 1995, the Company signed an agreement with Bundesanstalt fuer
vereinigungsbedingte Sonderaufgaben (BvS) for the privatization of
three state-owned chemical companies in eastern Germany (referred to
herein as BSL). Economic transfer of business operations to the
Company, through the privatization agreement and various service
agreements, occurred in June 1995 with legal closing anticipated
during the first half of 1997. The Company will include the financial
results of BSL effective with the legal closing date.
On closing, the Company will acquire 80 percent ownership in BSL for
an investment of approximately $200. BvS will maintain a 20 percent
ownership until the end of the restructuring period, which is expected
to be June 2000. After the restructuring period, the Company will have
a call option and BvS a put option for the remaining 20 percent of BSL
for an additional investment of approximately $160. BvS is providing
certain incentives during the restructuring period to cover portions
of the reconstruction program and has retained environmental cleanup
obligations for existing facilities.
The Company intends to build several new facilities at the BSL sites
including Dowlex linear low density polyethylene, polypropylene,
aniline and acrylic acid plants, and to upgrade the chlorine plant and
steam cracker. A multi-feedstock liquid pipeline is being constructed
from the port of Rostock to the Boehlen site, as well as harbor
facilities, terminals and pump stations. As part of the restructuring,
several facilities at BSL are being closed and demolished.
In December 1995, a Company-controlled consortium acquired the
shares owned by the Argentine government of Petroquimica Bahia Blanca
(PBB) and Indupa for $358. The consortium, in 1996, sold Indupa and
purchased Polisur S.A. This series of transactions resulted in the
consortium owning PBB (a leading ethylene producer) and Polisur (a
polyethylene manufacturer). The net investment by the Company was
approximately $382.
-32-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
C Acquisitions and Divestitures (Continued)
In January 1996, the Company and The Hartford Steam Boiler
Inspection and Insurance Company (HSB) formed, through the transfer of
net assets and existing businesses, a 60:40 joint venture named Radian
International LLC. The new company provides environmental, information
technology and strategic chemical management services to industries
and governments worldwide. The book value of the net assets
transferred by the Company was $33. HSB holds a put option requiring
the Company to purchase HSB's interest in Radian International LLC
during 1998 for approximately $150.
In January 1996, the Company acquired an 80 percent share in
EniChem's INCA International SpA subsidiary, a producer of
polyethylene terephthalate (PET) resin and its major precursor,
purified terephthalic acid (PTA). The investment by the Company was
$155.
In January 1996, DowElanco, a 60 percent owned joint venture,
entered into agreements with Mycogen Corporation and the Lubrizol
Corporation for transactions through which DowElanco, for a cash
investment of $158, acquired approximately a 47 percent equity stake
in Mycogen and Mycogen acquired DowElanco's United Agriseeds
subsidiary. In December 1996, DowElanco increased its equity stake in
Mycogen to over 50 percent.
In April 1996, the Company and E.I. duPont de Nemours and Company
formed, through the transfer of net assets and existing businesses, a
50:50 joint venture named DuPont Dow Elastomers L.L.C. The new company
focuses on the discovery, development, production and sale of
thermoset and thermoplastic elastomer products. The book value of the
net assets transferred by the Company was $527.
In September 1996, a consortium which includes a subsidiary of
Destec Energy, Inc. (Destec) completed the acquisition of the
Hazelwood Power Station, a large coal-fired power generation facility,
and the adjacent Hazelwood Mine from the State of Victoria, Australia.
The Destec subsidiary holds a 20 percent interest in the consortium.
The investment by Destec was $164. Dow's ownership of Destec is
approximately 80 percent.
Through the sales of shares in Oasis Pipeline in June and November
1996, the Company reduced its ownership from 70 percent to 30 percent,
recognizing pretax gains of $43 and $77, respectively.
In October 1996, DowBrands Inc., a wholly owned subsidiary of the
Company, and Melitta Bentz KG formed, through the transfer of net
assets and existing businesses, a 35:65 joint venture named Cofresco
Frischhalteprodukte GmbH & Co. KG. The new company focuses on the sale
of food care products in Western Europe. The book value of the net
assets transferred by the Company was $29.
In June 1995, the Company completed the sale of its 197 million
shares of Marion Merrell Dow Inc. to Hoechst A.G. for $5,069 or $25.75
per share. In addition, subsidiaries of the Company completed the sale
of the Company's Latin American pharmaceutical business based in
Argentina, Brazil and Mexico to Roussel Uclaf S.A. for $133. These two
transactions, net of taxes on income of $382, increased the Company's
second quarter of 1995 earnings by $169 or 62 cents per share. The
Company's consolidated statements of income and cash flows reflect the
pharmaceutical businesses as discontinued operations. Net sales of the
pharmaceutical businesses were $757 for the period January 1, 1995
through March 31, 1995 and $3,273 for the year 1994. Provisions for
taxes and interest expense were $36 and $77, respectively, for the 1995
period and $125 and $159 for 1994.
In the fourth quarter of 1994, the Company recorded a pretax charge
of $132 related to the pending sale of the Personal Care Business of
DowBrands. The sale was completed in November 1995 to Electronic Hair
Styling Inc. for $22.
In separate transactions in 1994 and 1993, the Company sold its
ownership in Magma Power Company and recognized pretax gains of $90 and
$62, respectively.
-33-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
D Taxes on Income
Operating loss carryforwards at December 31, 1996 amounted to $697 of
which $253 is subject to expiration in the years 1997 through 2001.
The remaining balances expire in years beyond 2001 or have an
indefinite carryforward period.
Tax credit carryforwards at December 31, 1996 amounted to $23 of
which $14 is subject to expiration in the years 1997 through 2001. The
remaining balances expire in years beyond 2001 or have an indefinite
carryforward period.
Undistributed earnings of foreign subsidiaries and related companies
which are deemed to be permanently invested amounted to $3,338, $3,026
and $2,053 at December 31, 1996, 1995 and 1994, respectively. It is not
practicable to calculate the unrecognized deferred tax liability on
those earnings.
The valuation allowance increased by $77 in 1996 due primarily to the
acquisition of Mycogen Corporation and an increase in the valuation
allowance in Spain.
Domestic and Foreign Components of Income before Provision for
Taxes on Income and Minority Interests
1996 1995 1994
- -----------------------------------------------------------------------------
Domestic $1,996 $1,513 $ 773
Foreign 1,292 2,016 853
- -----------------------------------------------------------------------------
Total $3,288 $3,529 $1,626
- -----------------------------------------------------------------------------
Reconciliation to U.S. Statutory Rate
1996 1995 1994
- -----------------------------------------------------------------------------
Taxes at U.S. statutory rate $1,151 $1,235 $569
Write-down of investment - 124 -
Adjustment of deferred taxes on basis differences 64 - -
Amortization of nondeductible intangibles 17 2 52
Foreign rates other than 35% 45 15 (26)
U.S. tax effect of foreign earnings and dividends (75) - 54
Other-net (15) 66 5
- -----------------------------------------------------------------------------
Total tax provision $1,187 $1,442 $654
- -----------------------------------------------------------------------------
Effective tax rate 36.1% 40.9% 40.2%
- -----------------------------------------------------------------------------
<TABLE>
Provision for Taxes on Income
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $499 $127 $ 626 $ 535 $112 $ 647 $329 $23 $352
State and local 35 11 46 132 - 132 13 3 16
Foreign 347 168 515 507 156 663 271 15 286
- ----------------------------------------------------------------------------------------------------------
Total $881 $306 $1,187 $1,174 $268 $1,442 $613 $41 $654
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Deferred Tax Balances at December 31
1996 1995
- --------------------------------------------------------------------
Property $ (939) $(801)
Tax loss and credit carryforwards 220 204
Long-term debt 103 177
Postretirement benefit obligations 527 596
Other accruals and reserves 341 75
Investments (77) (75)
Inventory (71) 32
Other-net (94) 120
- --------------------------------------------------------------------
Subtotal $ 10 $ 328
Less: Valuation allowance 93 16
- --------------------------------------------------------------------
Total $ (83) $ 312
- --------------------------------------------------------------------
-34-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
E Inventories
The reserves required to reduce inventories from the first-in, first-
out (FIFO) basis to the last-in, first-out (LIFO) basis at December 31,
1996 and 1995, amounted to $163 and $66, respectively. The inventories
that were valued on a LIFO basis, principally hydrocarbon and United
States (U.S.) chemical and plastics product inventories, represented 37
and 34 percent of the total inventories at December 31, 1996 and 1995,
respectively.
A reduction of certain inventories resulted in the liquidation of
some quantities of LIFO inventory, which increased pretax income by $40
in 1996, $8 in 1995 and $16 in 1994.
F Related Company Transactions
In May 1995, Dow Corning Corporation (Dow Corning), in which the
Company is a 50 percent shareholder, filed for protection under Chapter
11 of the U.S. Bankruptcy Code. As a result, the Company fully reserved
its investment in Dow Corning and will not recognize its 50 percent
share of future equity earnings while Dow Corning remains in Chapter 11
(see Note Q).
The Company's investments in related companies accounted for by the
equity method at December 31, 1996 and 1995 were $1,387 and $848 and
exceeded the Company's equity in the net assets of these companies by
$295 and $130, respectively. The excess of the Company's investments
over its share of the investees' net assets is considered goodwill and
is amortized over the estimated useful lives.
Dividends received from related companies were $95 in 1996, $33 in
1995 and $15 in 1994. All other transactions with related companies,
and balances due to or from related companies, were not material.
As discussed in Note C, the Company has agreed to acquire BSL with
legal closing anticipated in 1997. Economic transfer of the business
operations to the Company took place in June 1995 through the
privatization and various service agreements. These include a contract
to manage the operations of the sites and direct the reconstruction
efforts and the construction of new facilities; licensing and
technological assistance agreements to provide the Company's expertise
to the operations; and a marketing and sales agreement to market most
of the output of BSL's operations on a commission basis.
G Property
Estimated
Property at December 31 Useful Lives
(Years) 1996 1995
- --------------------------------------------------------------------------
Land -- $ 363 $ 371
Land and waterway improvements 20-25 670 678
Buildings 20-50 2,198 2,043
Transportation and
construction equipment 3-18 252 236
Machinery and equipment 5-20 16,837 16,452
Utility and supply lines 5-20 1,357 1,340
Office furniture and equipment 3-20 641 749
Wells and mineral reserves 10-20 416 383
Other 5-20 79 74
Construction in progress -- 924 892
- --------------------------------------------------------------------------
Total $23,737 $23,218
- --------------------------------------------------------------------------
Depreciation expense was $1,259 in 1996, $1,369 in 1995, and $1,224 in
1994. Manufacturing maintenance and repair costs were $695 in 1996,
$824 in 1995, and $865 in 1994. Capitalized interest was $35 in 1996,
$28 in 1995, and $66 in 1994.
H Leased Properties
The Company routinely leases premises for use as sales and
administrative offices, warehouses and tanks for product storage, motor
vehicles, railcars, computers, office machines and equipment under
operating leases. Gas turbines at two U.S. locations are leased. In
addition, an 80 percent owned U.S. subsidiary leases a 262 megawatt
syngas facility and a Canadian subsidiary leases an ethylene plant. The
Company has the option to purchase the ethylene plant and certain other
leased equipment and buildings at the termination of the leases.
-35-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
H Leased Properties (Continued)
Rental expenses under operating leases were $414, $433, and $371 for
1996, 1995 and 1994, respectively. The minimum future lease commitments
for all operating leases follow:
Minimum Operating Lease Commitments
- ------------------------------------------------
1997 $ 279
1998 255
1999 229
2000 443
2001 298
2002 and thereafter 691
- ------------------------------------------------
Total minimum lease requirements $2,195
- ------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities
Notes payable consists primarily of obligations due to banks with a
variety of interest rates and maturities. The notes payable outstanding
at December 31, 1996 and 1995 were $665 and $323, respectively, on
which the year-end weighted average interest rates were 4.69 percent
and 4.29 percent, respectively. This excludes the effects of short-term
borrowings in highly inflationary countries. Included in notes payable
at December 31, 1996 and 1995 were commercial paper amounts of $48 and
$4, respectively.
The average interest rate on long-term debt was 6.80 percent in 1996
compared to 6.73 percent in 1995. Annual installments on long-term debt
for the next five years are as follows: 1997, $607; 1998, $316; 1999,
$292; 2000, $181; 2001, $255.
The Company had unused and available credit facilities at December
31, 1996 with various U.S. and foreign banks totaling $1,913 which
required the payment of commitment fees. Additional unused credit
facilities totaling $1,364 at December 31, 1996 were available for use
by foreign subsidiaries. These facilities are available in support of
commercial paper borrowings and working capital requirements.
Promissory Notes and Debentures at December 31
1996 1995
- ----------------------------------------------------------------
8.25%, final maturity 1996 - $ 150
5.75%, final maturity 1997 $ 197 197
7.38%, final maturity 2002 145 145
9.35%, final maturity 2002 194 194
7.13%, final maturity 2003 148 148
8.63%, final maturity 2006 187 187
8.55%, final maturity 2009 139 140
9.00%, final maturity 2010 91 125
9.20%, final maturity 2010 181 193
6.85%, final maturity 2013 138 138
9.00%, final maturity 2021 219 219
8.85%, final maturity 2021 188 188
8.70%, final maturity 2022 95 96
7.38%, final maturity 2023 150 150
- ----------------------------------------------------------------
Subtotal $2,072 $2,270
- ----------------------------------------------------------------
-36-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities (Continued)
Foreign Bonds at December 31
1996 1995
- ---------------------------------------------------------------------------
5.63%, final maturity 1996, German mark - $ 209
10.87%, final maturity 1997, British pound sterling $ 378 345
4.00%, final maturity 1998, Japanese yen 172 194
4.75%, final maturity 1999, Swiss franc - 173
5.00%, final maturity 1999, German mark 193 -
4.63%, final maturity 2000, Swiss franc 111 130
6.38%, final maturity 2001, Japanese yen 215 242
- ---------------------------------------------------------------------------
Subtotal $1,069 $1,293
- ---------------------------------------------------------------------------
Other Facilities - Various Rates and Maturities at December 31
1996 1995
- ---------------------------------------------------------------------------
U.S. dollar loans $ 164 $ 126
Foreign currency loans 240 168
9.42%, final maturity 2004, Dow ESOP 94 103
Medium-term notes, final maturity 2022 370 380
Pollution control/industrial revenue bonds,
final maturity 2024 806 781
Unexpended construction funds (4) (4)
Capital lease obligations 7 11
- ---------------------------------------------------------------------------
Subtotal $1,677 $1,565
- ---------------------------------------------------------------------------
Long-Term Debt at December 31
1996 1995
- ---------------------------------------------------------------------------
Promissory notes and debentures $2,072 $2,270
Foreign bonds 1,069 1,293
Other facilities 1,677 1,565
Less unamortized debt discount (15) (48)
Less long-term debt due within one year (607) (375)
- ---------------------------------------------------------------------------
Long-term debt $4,196 $4,705
- ---------------------------------------------------------------------------
-37-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
J Financial Instruments
<TABLE>
Fair Value of Financial Instruments at December 31
1996 1995
- ------------------------------------------------------------------------------------------------
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Interest-bearing deposits $ 250 - - $ 250 $ 571 - - $ 571
Marketable securities:
Debt securities 3,012 $ 20 $ (5) 3,027 3,603 $ 38 $ (1) 3,640
Equity securities 319 129 (12) 436 367 100 (33) 434
Other 280 236 - 516 262 26 - 288
Total investments $ 3,861 $385 $ (17) $ 4,229 $ 4,803 $ 164 (34) $ 4,933
- ------------------------------------------------------------------------------------------------
Long-term debt $(4,196) - $(369) $(4,565) $(4,705) - $(442) $(5,147)
- ------------------------------------------------------------------------------------------------
Derivatives relating to:
Foreign currency - $113 $ (71) $ 42 - $ 48 $ (46) $ 2
Interest rates - 8 (26) (18) - 23 (53) (30)
Cross-currency swaps - 3 (29) (26) - 1 (161) (160)
- ------------------------------------------------------------------------------------------------
The cost approximates the fair value for all other financial instruments.
</TABLE>
Investments
Total investments at December 31, 1996 and 1995 included cash
equivalents of $1,770 and $2,738, marketable securities and interest-
bearing deposits of $399 and $611, and other investments of $2,060 and
$1,558, respectively.
The proceeds from sales of available-for-sale securities were $2,085
and $1,292 and the sales resulted in gross realized gains of $129 and
$61 and losses of $33 and $20 in 1996 and 1995, respectively.
The Company's investments in marketable securities are primarily
classified as available-for-sale. Maturities for the substantial
majority of debt securities were less than five years at December 31,
1996 and 1995.
Foreign Currency Risk Management
The Company's global operations require active participation in the
foreign exchange markets. The Company enters into foreign exchange
forward contracts and options to hedge various currency exposures or
create desired exposures. Exposures primarily relate to assets and
liabilities denominated in foreign currency in Europe, Asia Pacific and
Canada; bonds denominated in foreign currency; and economic exposure
derived from the risk that currency fluctuations could affect the
dollar value of future cash flows at the operating income level. The
primary business objective of the activity is to optimize the U.S.
dollar value of the Company's assets, liabilities and future cash flows
with respect to exchange rate fluctuations. Hedging is done on a net
exposure basis. Namely, assets and liabilities denominated in the same
currency are netted and only the net balance is hedged.
At December 31, 1996 and 1995, the Company had forward contracts
outstanding with various expiration dates (primarily in January of the
next year) to buy, sell or exchange foreign currencies with a U.S.
dollar equivalent of $7,442 and $5,805, respectively. The unrealized
gains or losses on these contracts, based on the foreign exchange rates
at December 31, 1996 and 1995, were gains of $42 and $2, respectively.
At December 31, 1996 and 1995, the Company had cross-currency swaps
outstanding with notional principal amounts of $1,356 and $2,247,
respectively. The $3 in gains and $29 in losses in 1996 and the $1 in
gains and $161 in losses in 1995 related to cross-currency swaps. These
were primarily recognized in income in "Interest income and foreign
exchange-net" and offset the gains and losses from the assets and
liabilities being hedged.
-38-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
J Financial Instruments (Continued)
Interest Rate Risk Management
The Company enters into various interest rate contracts with the
objective of lowering funding costs, diversifying sources of funding or
altering interest rate exposure. In these contracts, the Company agrees
with other parties to exchange, at specified intervals, the difference
between fixed and floating interest amounts calculated on an agreed
upon notional principal amount.
The notional principal amounts on all types of interest derivative
contracts at December 31, 1996 and 1995 totaled $3,469 and $3,455 with
a weighted average remaining life of 3.0 and 2.7 years, respectively.
Interest rate derivatives representing hedges of debt-related exposures
resulted in unrealized gains of $7 and $19 and losses of $23 and $50 in
1996 and 1995, respectively.
Interest Derivatives at December 31, 1996
Notional Weighted Average Rate
---------------------
Amount Maturities Receive Pay
- ----------------------------------------------------------------------------
Receive fixed hedge $1,175 1997-2004 6.5% 5.3%
Receive floating hedge 1,426 1997-2009 5.7% 7.2%
Other 868 1997-2003 - -
- ----------------------------------------------------------------------------
Interest Derivatives at December 31, 1995
Notional Weighted Average Rate
---------------------
Amount Maturities Receive Pay
- ----------------------------------------------------------------------------
Receive fixed hedge $1,282 1996-2003 6.5% 5.9%
Receive floating hedge 1,507 1996-2004 5.9% 7.0%
Other 666 1996-2005 - -
- ----------------------------------------------------------------------------
The Company's risk management program for both foreign currency and
interest rate risk is based on fundamental, mathematical and technical
models that take into account the implicit cost of hedging. Risks
created by derivative instruments and the mark-to-market valuations of
positions are strictly monitored at all times. The Company uses value
at risk and stress tests to monitor risk. Because the counterparties to
these contracts are major international financial institutions, credit
risk arising from these contracts is not significant and the Company
does not anticipate any such losses. The net cash requirements arising
from risk management activities are not expected to be material. The
Company's overall financial strategies and impacts from using
derivatives in its risk management program are reviewed periodically
with the Finance Committee of the Company's Board of Directors and
revised as market conditions dictate.
The Company's global orientation in diverse businesses with a large
number of diverse customers and suppliers minimizes concentrations of
credit risk. No concentration of credit risk existed at December 31,
1996.
-39-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
K Limited Partnerships
In December 1991, three wholly owned subsidiaries of the Company
contributed assets with an aggregate market value of
$2 billion to DowBrands L.P., a newly formed Delaware limited
partnership. Outside investors made cash contributions of $45
in December 1991 and $855 in June 1992 in exchange for an aggregate 31
percent limited partner interest in DowBrands L.P.
In April 1993, three wholly owned subsidiaries of the Company contributed
assets with an aggregate fair value of $977 to Chemtech Royalty
Associates L.P. (Chemtech), a newly formed Delaware limited
partnership. In August and October 1993, outside investors acquired
limited partner interests in Chemtech totaling 20 percent in exchange
for $200.
The two partnerships (DowBrands L.P. and Chemtech)
are separate and distinct legal entities from the Company and its
affiliates and have separate assets, liabilities, businesses and
operations. Each partnership has as a general partner, a wholly owned
subsidiary of the Company, which directs business activities and has
fiduciary responsibilities to the partnership and its other members.
The outside investors in each partnership receive a cumulative annual
priority return on their investments and participate in residual
earnings. The annual priority return is $68 and $14 for DowBrands L.P.
and Chemtech, respectively.
The partnerships will not terminate unless a termination or liquidation
event occurs. The DowBrands L.P. outside investors may cause such an event
to occur at any time. The Chemtech outside investors may cause such an event
to occur in the year 2000. In addition, the partnership agreements
provide for various windup provisions wherein subsidiaries of the
Company may purchase at any time the limited partnership interests of
the outside investors. Upon windup, liquidation or termination, the
partners' capital accounts will be redeemed at current fair values.
For financial reporting purposes, the assets (other than intercompany
loans, which are eliminated), liabilities, results of operations and
cash flows of the partnerships and subsidiaries are included in the
Company's consolidated financial statements and outside investors'
limited partnership interests are reflected as minority interests.
Supplemental contractual disclosures required by the partnership
agreements are contained within Note R to the Financial Statements of
the December 31, 1993 Form 10-K of The Dow Chemical Company.
L Stockholders' Equity
In 1989, the Board of Directors authorized, subject to certain business
and market conditions, the purchase of up to 18,000,000 shares of the
Company's common stock. In August 1995, the purchases under this
authorization were completed.
In 1995, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 25,000,000 shares
of the Company's common stock. In July 1996, the purchases under this
authorization were completed.
In 1996, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 20,000,000 shares
of the Company's common stock. At December 31, 1996, the number of
shares purchased under this authorization was 4,814,159. From time to
time, the Company utilizes options as part of its stock repurchase
program. The Company's potential repurchase obligation related to these
options is reclassified from stockholders' equity to temporary equity.
The number of treasury shares purchased was 14,926,000 in 1996,
29,188,000 in 1995, and 591,000 in 1994. The number of treasury shares
issued to employees under option and purchase programs was 5,108,000 in
1996, 3,022,000 in 1995, and 2,836,000 in 1994. The number of treasury
shares contributed to the U.S. pension plan for funding future retiree
health care benefits, through a 401(h) account, was 391,000 in 1994.
There are no significant restrictions limiting the Company's ability
to pay dividends.
Gross undistributed earnings of 20%-50% owned companies included in
retained earnings were $123 and $95 at
December 31, 1996 and 1995, respectively.
In calculating earnings per common share, no adjustment was made for
common shares issuable under award, option and stock purchase plans, or
conversion of preferred shares issued, because there would be no
material dilution.
Reserved Treasury Stock at December 31
Shares (000) 1996 1995 1994
- ----------------------------------------------------------
Stock option plans 14,162 16,735 16,517
Employees' stock purchase plan 878 1,083 894
- ----------------------------------------------------------
Total shares reserved 15,040 17,818 17,411
- ----------------------------------------------------------
-40-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
M Stock Compensation Plans
At December 31, 1996 the Company had Board authorized stock-based
compensation plans under which shares or options could be granted to
employees and outside directors. The Company measures the compensation
cost for these plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25 ( Accounting for Stock Issued to
Employees). Given the terms of the Company's plans, no compensation
cost has been recognized for its fixed stock option plans and its
stock purchase plan.
The Company's reported net income and earnings per share would have
been reduced had compensation cost for the Company's stock-based
compensation plans been determined using the fair value method of
accounting as set forth in SFAS No. 123 (Accounting for Stock-Based
Compensation). For purposes of estimating the fair value disclosures
below, the fair value of each stock option has been estimated on the
grant date with a binomial option-pricing model using the following
weighted average assumptions: dividend yield of 4 percent; expected
volatility of 16.12 percent; risk-free interest rate of 6.35 percent;
and expected lives of seven years for the fixed stock option plans and
0.83 years for the Stock Purchase Plan. The effects of using the fair
value method of accounting are indicated in the pro forma amounts
below:
1996 1995 1994
----------------------------
Net Income available for As reported $1,900 $2,071 $931
Common Stockholders Pro forma 1,873 2,039 902
Earnings per Common Share As reported $7.71 $7.72 $3.37
Pro forma 7.61 7.60 3.27
Fixed Stock Option Plans
Under the 1988 Award and Option Plan, the Company may grant options or
shares of common stock to its employees subject to certain annual
restrictions. Under the 1994 Option Plan, the Company may grant up to
100,000 options or shares of common stock to outside directors. Under
both plans, the terms are fixed at the grant date. At December 31,
1996 there were 871,892 shares available for grant under the 1988 Plan
and 90,700 shares available for grant under the 1994 Plan. The
exercise price of each option equals the market price of the Company's
stock on the date of grant and an option's maximum term is 10 years.
Options under the 1988 Plan vest after one year; those under the 1994
Plan vest after three years.
1996 1995 1994
- ----------------------------------------------------------------------------
Share Exercise Share Exercise Share Exercise
(000) Price (000) Price (000) Price
- ----------------------------------------------------------------------------
Outstanding at
beginning of year 15,020 $59.13 14,735 $56.42 14,063 $53.68
Granted 1,859 75.38 2,681 67.75 2,634 65.10
Exercised (4,682) 57.25 (2,354) 51.93 (1,865) 47.84
Forfeited/Expired (213) 42.45 (42) 61.21 (97) 59.70
Outstanding at end
of year 11,984 $62.69 15,020 $59.13 14,735 $56.42
- ----------------------------------------------------------------------------
Exercisable at end
of year 10,151 $60.42 12,373 $57.31 12,189 $54.55
Weighted average fair
value of options
granted during the year $14.19 $12.88 $12.13
-41-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
M Stock Compensation Plans (Continued)
<TABLE>
Fixed options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------
Range of Number Remaining Exercise Number Exerecise
Exercise Price Outstanding Contractual Life Price Exercisable Price
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
$41.00 to $53.00 1,892 5.33 years $49.51 1,892 $49.51
$53.01 to $60.00 2,924 4.64 years 57.94 2,924 57.94
$60.01 to $67.00 2,967 5.78 years 63.86 2,953 63.85
$67.01 to $76.00 4,201 8.51 years 71.11 2,382 67.89
- ----------------------------------------------------------------------------------------------
Total $41.00 to $76.00 11,984 6.39 years $62.69 10,151 $60.42
- ---------------------------------------------------------------------------------------------
</TABLE>
Stock Purchase Plan
Annually the Board authorizes the Employees' Stock Purchase Plan. Most
employees are eligible to purchase shares of common stock of the
Company valued at up to 10 percent of their annual base earnings. The
value is determined using the plan price times the number of shares
subscribed to by the employee. The plan price of the stock is
approximately 85 percent of the market price. Approximately 39 to 46
percent of eligible employees have participated in the plan in the
last three years.
1996 1995 1994
- ----------------------------------------------------------------------------
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
- ----------------------------------------------------------------------------
Outstanding at
beginning of year 1,083 $55.00 894 $54.50 1,040 $45.00
Granted 1,229 67.75 1,543 55.00 1,297 54.50
Exercised (1,387) 57.79 (1,317) 54.67 (1,420) 47.54
Forfeited/Expired (47) 67.75 (37) 55.00 (23) 54.50
- ----------------------------------------------------------------------------
Outstanding & exercisable
at end of year 878 $67.75 1,083 $55.00 894 $54.50
- ----------------------------------------------------------------------------
Weighted average fair value
of options granted
during the year $13.53 $10.99 $10.88
Deferred Stock Plan
The Company grants deferred stock to certain key employees. The
vesting period for such grants is generally five years. After the
vesting period, the shares are issued to the employee. Compensation
expense equal to the fair market value of the shares on the date of
the grant is generally recognized in the period of the grant. This
amounted to $8, $7, and $6 for 1996, 1995, and 1994, respectively.
The number of deferred shares outstanding were 1,216,000; 1,193,000
and 1,224,000 for 1996, 1995, and 1994, respectively.
N Redeemable Preferred Stock
The Company has an employee stock ownership plan (the ESOP), which is
an integral part of the Salaried Employees Savings Plan.
The ESOP borrowed funds at a 9.42 percent interest rate with a final
maturity in 2004, and used the proceeds to purchase convertible
preferred stock from the Company. The preferred stock is convertible
into the Company's common stock at $86.125 per common share. The
dividend yield on the preferred stock is 7.75 percent of the $86.125
redemption value.
In the event the Company consummates certain merger or consolidation
transactions involving the Company's common stock, the preferred stock
must be redeemed by the Company for cash at a redemption price equal to
105 percent of the $86.125 per share redemption value, plus accrued and
unpaid dividends.
The convertible preferred stock issued to the ESOP is reported as
temporary equity in the Company's balance sheet. Since the Company has
guaranteed the ESOP's borrowings, the principal amount of the ESOP loan
is reported as long-term debt and a reduction of temporary equity in
the Company's balance sheet.
-42-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
O Pension Plans
The Company has defined benefit pension plans which cover employees in
the U.S. and a number of foreign countries. The Company's funding
policy is to contribute annually, at a rate that is intended to
approximate a level percentage of compensation for the covered
employees, to those plans where pension laws and economics either
require or encourage funding.
The U.S. funded plan covering the parent company is the largest plan.
Its benefits are based on length of service and the employee's three-
highest consecutive years of compensation. The weighted average
discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligations were 7.25 and 5.5 percent, respectively, for 1996 and 1995.
The assumed long-term rate of return on assets was 9 percent for 1996
and 1995.
All other pension plans used assumptions in determining the actuarial
present value of the projected benefit obligations that are consistent
with (but not identical to) those of the U.S. plan.
Defined contribution plans cover employees in some subsidiaries in
the U.S. and in other countries, including Australia, France, Spain,
and the United Kingdom. In addition, employees in the U.S. are eligible
to participate in defined contribution plans (Employee Savings Plans)
by contributing a portion of their compensation which is then matched
by the Company. Contributions charged to income for defined
contribution plans were $77 in 1996, $75 in 1995, and $49 in 1994.
The net periodic pension cost for all significant defined benefit
plans was as follows:
Net Periodic Pension Cost
1996 1995 1994
- ------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 168 $ 146 $ 150
Interest cost on projected benefit obligation 388 374 334
Actual (return) on assets (864) (1,062) (94)
Amortization and deferred amounts 480 686 (256)
Employee contributions to the plans (8) (8) (8)
- ------------------------------------------------------------------------------
Net periodic pension cost $ 164 $ 136 $ 126
- ------------------------------------------------------------------------------
The funded status for all significant defined benefit plans was as follows:
Defined Benefit Plans at December 31
Fully Funded Partially Funded
- -------------------------------------------------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $(4,406) $(4,098) $(400) $(372)
Nonvested (165) (310) (29) (39)
- -------------------------------------------------------------------------------
Accumulated benefit obligation (4,571) (4,408) (429) (411)
Effect of projected compensation increases (793) (787) (116) (101)
- -------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date (5,364) (5,195) (545) (512)
Plan assets at market value, primarily publicly
traded stocks and bonds 5,985 5,321 54 56
- -------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 621 126 (491) (456)
Unrecognized transition obligation 18 34 23 27
Unrecognized net (gains) losses (511) (154) 54 19
Unrecognized prior service cost 178 193 32 35
Additional minimum liability - - (61) (65)
- -------------------------------------------------------------------------------
Accrued pension asset (liability) $ 306 $ 199 $(443) $(440)
- -------------------------------------------------------------------------------
-44-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
P Other Postretirement Benefits
The Company provides certain health care and life insurance benefits to
retired employees. The Company funds most of the cost of these health
care and life insurance benefits as incurred.
The U.S. plan covering the parent company is the largest plan. The
plan provides health care benefits, including hospital, physicians'
services, drug and major medical expense coverage, and life insurance
benefits. For employees hired before January 1, 1993, the plan provides
benefits supplemental to Medicare when retirees are eligible for these
benefits. The cost of these benefits is shared by the Company and the
retiree, with the Company portion increasing as the retiree has
increased years of credited service. The Company portion is capped at
approximately twice the 1993 cost per person. The Company has the
ability to change these benefits at any time.
For 1996, a discount rate of 7.25 percent and weighted average
medical cost trend rates starting at 7.20 percent and declining to 4.60
percent in 2004 were assumed. For 1995, the discount rate assumption
was 7.25 percent and the medical cost trend rate assumption was 7.52
percent declining to 4.60 percent in 2004. The assumed long-term rate
of return on assets was 9 percent for 1996 and 1995. Increasing the
assumed medical cost trend rate by one percentage point in each year
would increase the accumulated postretirement benefit obligation at
December 31, 1996 by $45 and the net periodic postretirement benefit
cost for the year by $4.
All other postretirement health care and other benefit plans used
assumptions in determining the actuarial present value of accumulated
postretirement benefit obligations that are consistent with (but not
identical to) those of the U.S. parent company plan.
The net periodic benefit cost for all significant plans was as
follows:
Net Periodic Postretirement Cost
1996 1995 1994
- --------------------------------------------------------------------------
Service cost - benefits earned during the period $ 19 $ 21 $ 24
Interest cost on accumulated postretirement
benefit obligation 79 86 88
Actual (return) on assets (15) (16) -
Amortization and deferred amounts (43) (36) (42)
- --------------------------------------------------------------------------
Net periodic postretirement cost $ 40 $ 55 $ 70
- --------------------------------------------------------------------------
The postretirement benefit obligations for all significant plans were
as follows:
Partially Funded Postretirement Plans at December 31
1996 1995
- --------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ (680) $ (697)
Fully eligible active plan participants (210) (199)
Other active plan participants (248) (214)
- --------------------------------------------------------------------------
Total accumulated postretirement benefit obligation (1,138) (1,110)
Plan assets at market value, primarily publicly traded
stocks and bonds 123 103
- --------------------------------------------------------------------------
Unfunded accumulated postretirement
benefit obligation (1,015) (1,007)
Unrecognized gain from experience favorable
to assumptions (213) (224)
Negative prior service costs (279) (312)
- --------------------------------------------------------------------------
Accrued postretirement benefit liability $(1,507) $(1,543)
- --------------------------------------------------------------------------
-44-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
Q Commitments and Contingent Liabilities
In January 1994, Dow Corning Corporation (Dow Corning), in which Dow is
a 50 percent shareholder, announced a pretax charge of $640 ($415 after
tax) for the fourth quarter of 1993. In January 1995, Dow Corning
announced a pretax charge of $241 ($152 after tax) for the fourth
quarter of 1994. These charges included Dow Corning's best estimate of
its potential liability for breast implant litigation based on a global
Breast Implant Litigation Settlement Agreement (the Settlement
Agreement); litigation and claims outside of the Settlement Agreement;
and provisions for legal, administrative and research costs related to
breast implants. The charges for 1993 and 1994 included pretax amounts
of $1,240 and $441, respectively, less expected insurance recoveries of
$600 and $200, respectively. The 1993 amounts reported by Dow Corning
were determined on a present value basis. On an undiscounted basis, the
estimated liability above for 1993 was $2,300 less expected insurance
recoveries of $1,200.
As a result of the Dow Corning actions, the Company recorded its 50
percent share of the charges, net of tax benefits available to Dow. The
impact on the Company's net income was a charge of $192 for 1993 and a
charge of $70 for 1994.
Dow Corning reported an after tax net loss of $167 for the second
quarter of 1995, of which the Company's share amounted to $83. Dow
Corning's second quarter loss was a result of a $221 after tax charge
taken to reflect a change in accounting method from the present value
basis noted above to an undiscounted basis resulting from the
uncertainties associated with its voluntary filing for protection under
Chapter 11 of the United States Bankruptcy Code on May 15, 1995. As a
result of Dow Corning's 1995 second quarter loss and Chapter 11 filing,
the Company recognized a pretax charge against income of $330 for the
second quarter of 1995, fully reserved its investment in Dow Corning
and will not recognize its 50 percent share of future equity earnings
while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States
District Court for the Northern District of Alabama approved the
Settlement Agreement, pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded that the
Settlement Agreement was not workable in its then-current form because
the funds committed to it by industry participants were inadequate. The
order provided that plaintiffs who had previously agreed to participate
in the Settlement Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product liability
claims against Dow Corning is limited to its investment in Dow Corning
which, after the second quarter of 1995 charge noted above, is zero. As
a result, any future charges by Dow Corning related to such claims or
as a result of the Chapter 11 proceeding would not have an adverse
impact on the Company's consolidated financial statements.
The Company is separately named as a defendant in over 13,000 breast
implant product liability cases. In these situations, plaintiffs have
alleged that the Company should be liable for Dow Corning's alleged
torts based on the Company's 50 percent stock ownership in Dow Corning
and that the Company should be liable by virtue of alleged "direct
participation" by the Company or its agents in Dow Corning's breast
implant business. These latter, direct participation claims include
counts sounding in strict liability, fraud, aiding and abetting,
conspiracy, concert of action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel on
Multidistrict Litigation to oversee all of the product liability cases
involving silicone breast implants filed in the U.S. federal courts.
Initially, in a ruling issued on December 1, 1993, Judge Pointer
granted the Company's motion for summary judgment, finding that there
was no basis on which a jury could conclude that the Company was liable
for any claimed defects in the breast implants manufactured by Dow
Corning. In an interlocutory opinion issued on April 25, 1995, however,
Judge Pointer affirmed his December 1993 ruling as to plaintiffs'
corporate control claims but vacated that ruling as to plaintiffs'
direct participation claims.
It is the opinion of the Company's management that the possibility is
remote that plaintiffs will prevail on the theory that the Company
should be liable in the breast implant litigation because of its
shareholder relationship with Dow Corning. The Company's management
believes that there is no merit to plaintiffs' claims that the Company
is liable for alleged defects in Dow Corning's silicone products
because of the Company's alleged direct participation in the
development of those products, and the Company intends to contest those
claims vigorously. Management believes that the possibility is remote
that a resolution of plaintiffs' direct participation claims, including
the vigorous defense against those claims, would have a material
adverse impact on the Company's financial position or cash flows.
Nevertheless, in light of Judge Pointer's April 25 ruling, it is
possible that a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, could have a
material adverse impact on the Company's net income for a particular
period, although it is impossible at this time to estimate the range or
amount of any such impact.
-45-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
Q Commitments and Contingent Liabilities (Continued)
Numerous lawsuits have been brought against the Company and other
chemical companies alleging that the manufacture, distribution or use
of pesticides containing dibromochloropropane (DBCP) has caused, among
other things, property damage, including contamination of groundwater.
To date, there have been no verdicts or judgments against the Company
in connection with these allegations. It is the opinion of the
Company's management that the possibility is remote that the resolution
of such lawsuits will have a material adverse impact on the Company's
consolidated financial statements.
The Company has accrued $265 at December 31, 1996, for probable
environmental remediation and restoration liabilities, including $15
for the remediation of Superfund sites. This is management's best
estimate of these liabilities, although possible costs for
environmental remediation and restoration could range up to twice that
amount. Accruals for environmental matters are recorded when it is
probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based on current law and
existing technologies. It is the opinion of the Company's management
that the possibility is remote that costs in excess of those accrued or
disclosed will have a material adverse impact on the Company's
consolidated financial statements.
In addition to the breast implant, DBCP and environmental remediation
matters, the Company is party to a number of other claims and lawsuits
arising out of the normal course of business with respect to commercial
matters, including product liability, governmental regulation and other
actions. Certain of these actions purport to be class actions and seek
damages in very large amounts. All such claims are being contested.
Dow has an active risk management program consisting of numerous
insurance policies secured from many carriers at various times. These
policies provide coverage which will be utilized to minimize the
impact, if any, of the contingencies described above.
Except for the possible effect on the Company's net income for breast
implant litigation described above, it is the opinion of the Company's
management that the possibility is remote that the aggregate of all
claims and lawsuits will have a material adverse impact on the
Company's consolidated financial statements.
Eli Lilly and Company (Lilly) is a 40 percent partner with the
Company in DowElanco. Lilly holds a put option requiring the Company to
purchase Lilly's interest in DowElanco. Lilly notified the company in
September 1994 that it did not plan to exercise the put option at that
time. No subsequent notification has been received.
A Canadian subsidiary has entered into two 20-year agreements, which
expire in 1998 and 2004, to purchase ethylene. The purchase price is
determined on a cost-of-service basis which, in addition to covering
all operating expenses and debt service costs, provides the owner of
the manufacturing plants with a specified return on capital. Total
purchases under the agreements were $221, $204 and $252 in 1996, 1995
and 1994, respectively.
At December 31, 1996, the Company had various outstanding commitments
for take or pay and throughput agreements, including the Canadian
subsidiary's ethylene contracts, for terms extending from one to twenty
years. In general, such commitments were at prices not in excess of
current market prices. The table below shows the fixed and determinable
portion of the take or pay and throughput obligations:
Fixed and Determinable Portion of Obligations
- --------------------------------------------------------
1997 $ 223
1998 191
1999 121
2000 95
2001 69
2002 through expiration of contracts 726
- --------------------------------------------------------
Total $1,425
- --------------------------------------------------------
In addition to the take or pay obligations at December 31, 1996, the
Company had outstanding purchase commitments which range from one to
eighteen years for steam, electrical power, materials, property, and
other items used in the normal course of business of approximately
$200. In general, such commitments were at prices not in excess of
current market prices. The Company also had commitments for loan
guarantees, related to Destec, of $1,282 and outstanding direct and
indirect commitments for construction performance and lease payment
guarantees and other obligations of $310.
-46-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
R Supplementary Information
Accrued and Other Current Liabilities at December 31
1996 1995
- ------------------------------------------------------
Accrued vacations $ 180 $ 178
Employees' retirement plans 147 152
Interest payable 123 125
Accrued payroll 329 288
Accrued miscellaneous taxes 136 123
Insurance companies' reserves 196 192
Sundry 486 561
- ------------------------------------------------------
Total $1,597 $1,619
- ------------------------------------------------------
Sundry Income (Expense) - Net
1996 1995 1994
- ----------------------------------------------------------------
Royalty income $ 26 $ 23 $ 21
Gain on sales of assets and securities 249 103 58
Dividend income 25 8 32
Other-net 43 (91) (28)
- ----------------------------------------------------------------
Total $ 343 $ 43 $ 83
- ----------------------------------------------------------------
Other Supplementary Information
1996 1995 1994
- ----------------------------------------------------------------
Cash payments for interest $ 496 $ 501 $568
Cash payments for taxes on income 1,364 1,210 541
Provision for doubtful receivables 29 18 7
- ----------------------------------------------------------------
S Industry Segments and Geographic Areas
The Company is a diversified, worldwide manufacturer and supplier of
more than 2,400 product families, which are grouped into the following
industry segments: Performance Plastics, Performance Chemicals,
Plastics, Chemicals and Metals, Hydrocarbons and Energy, and
Diversified Businesses and Unallocated. (For a description of the
Industry Segments, see the Corporate Profile beginning on page 4, which
forms an integral part of the Financial Statements.)
The Company's wide range of products are used primarily as raw
materials in the manufacture of customer products and services.
Industries served by the Company include aerospace, appliance,
automotive, agriculture, building and construction, chemical
processing, consumer products, electronics, environmental services,
furniture, housewares, insurance and finance, metalworking, oil and
gas, packaging, processed foods, pulp and paper, utilities and water
treatment.
The Company operates 115 manufacturing sites in 37 countries. The
Company conducts its worldwide operations through 15 global businesses
which represent the aggregation of products on the basis of process
technology, end-use markets and channels of distribution.
Transfers between area and industry segments are generally valued at
cost. The exception is that movements between the agricultural
chemicals and consumer products businesses and the other businesses are
generally valued at market-based prices.
-47-
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
In millions, except for share amounts
- ---------------------------------------------------------------------------
S Industry Segments and Geographic Areas (Continued)
<TABLE>
Industry Segment Results
Corporate,
Diversified Discontinued
Performance Performance Chemicals Hydrocarbons Businesses Operations & Consoli-
Plastics Chemicals Plastics and Metals and Energy Unallocated Eliminations dated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated customers $5,337 $4,224 $3,862 $ 3,123 $2,442 $1,065 - $20,053
Intersegment transfers 23 15 136 766 2,703 1 $(3,644) -
Operating income (loss)(1) 1,167 721 794 737 (57) (275) - 3,087
Identifiable assets 5,212 4,173 3,437 2,878 3,308 1,474 4,191 24,673
Depreciation 294 284 255 227 153 46 - 1,259
Capital expenditures 266 241 114 319 362 42 - 1,344
- ----------------------------------------------------------------------------------------------------------------------------------
1995
Sales to unaffiliated customers $5,369 $4,240 $3,932 $ 3,322 $2,371 $ 966 - $20,200
Intersegment transfers 19 26 106 710 2,247 - $(3,108) -
Operating income (loss)(1) 1,056 670 1,475 1,136 (83) (363) - 3,891
Identifiable assets 4,930 4,049 2,789 2,780 2,517 1,428 5,089 23,582
Depreciation 294 320 327 280 104 44 - 1,369
Capital expenditures 175 274 81 516 342 29 - 1,417
- ----------------------------------------------------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $4,538 $3,672 $3,064 $ 2,471 $2,044 $ 953 - $16,742
Intersegment transfers 18 28 104 680 2,365 - $(3,195) -
Operating income (loss)(1) 611 514 531 337 74 (247) - 1,820
Identifiable assets 4,754 3,697 3,008 2,756 2,084 1,675 8,571 26,545
Depreciation 263 273 311 241 92 44 - 1,224
Capital expenditures 134 253 83 152 388 64 109 1,183
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Geographic Area Results Discontinued
Rest of Operations & Consoli-
United States Europe World Eliminations dated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated customers $ 8,789 $6,351 $4,913 - $20,053
Intersegment transfers 1,790 421 547 $(2,758) -
Operating income(1) 1,234 783 1,070 - 3,087
Identifiable assets 10,626 6,547 7,500 - 24,673
Gross plant properties 12,667 7,236 3,834 - 23,737
Capital expenditures 785 392 167 - 1,344
- ----------------------------------------------------------------------------------------------------------------------------------
1995
Sales to unaffiliated customers $ 9,035 $6,411 $4,754 - $20,200
Intersegment transfers 1,728 515 454 $(2,697) -
Operating Income(1) 1,603 1,112 1,176 - 3,891
Identifiable assets 10,127 6,914 6,541 - 23,582
Gross plant properties 12,416 7,466 3,336 - 23,218
Capital expenditures 1,008 295 114 - 1,417
- ----------------------------------------------------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $ 8,093 $4,809 $3,840 - $16,742
Intersegment transfers 1,424 447 341 $(2,212) -
Operating income(1) 1,024 237 559 - 1,820
Identifiable assets 9,399 5,516 4,867 6,763 26,545
Gross plant properties 11,729 6,725 3,33 1,419 23,210
Capital expenditures 692 234 148 109 1,183
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The reconciliation between "Operating Income" and "Income before Provision
for Taxes on Income and Minority Interests" consists of Other Income Expense)"
items and can be found in the Consolidated Statements of Income on Page 25.
-48-
</TABLE>
Quarterly Statistics
In millions, except for per share amounts (Unaudited)
- -----------------------------------------------------------------------------
1996 1st 2nd 3rd 4th Year
- -----------------------------------------------------------------------------
Net sales $4,982 $5,176 $4,992 $4,903 $20,053
Operating income 868 896 746 577 3,087
Income before taxes on income 883 939 (1) 787 679 (1) 3,288
and minority interests
Income from continuing
operations 476 546 469 409 1,900
Net income available for common
stockholders 476 546 469 409 1,900
Earnings per common share from
continuing operations 1.92 1.69 7.71 1.90 2.20
Earnings per common share 1.92 1.69 7.71 1.90 2.20
Common stock dividends declared
per share 0.75 0.75 3.00 0.75 0.75
Market price range of common stock:
High 90.00 92.50 82.75 85.75 92.50
Low 68.25 76.00 69.75 77.25 68.25
- -----------------------------------------------------------------------------
1995 1st 2nd 3rd 4th Year
- -----------------------------------------------------------------------------
Net sales $5,205 $5,517 $4,884 $4,594 $20,200
Operating income 1,075 1,207 946 663 3,891
Income before taxes on income
and minority interests 1,048 832 955 694 3,529
Income from continuing
operations 564 334 571 415 1,884
Net income available for common
stockholders 582 503 571 415 2,071
Earnings per common share from
continuing operations 2.03 1.22 2.15 1.63 7.03
Earnings per common share 2.10 1.84 2.15 1.63 7.72
Common stock dividends declared
per share 0.65 0.75 0.75 0.75 2.90
Market price range of common stock:
High 74.63 75.00 78.00 74.38 78.00
Low 61.38 68.00 71.63 65.50 61.38
- -----------------------------------------------------------------------------
(1) Includes the sale of part of Oasis Pipeline as discussed in
Note C to the Financial Statements.
See Notes to Financial Statements
-49-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no reported disagreement on any matter of accounting
principles or procedures or financial statement disclosure in 1996 with
the Independent Auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and executive officers of the Company
is contained in the definitive Proxy Statement for the Annual Meeting
of Stockholders of The Dow Chemical Company to be held on May 15, 1997,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in the
definitive Proxy Statement for the Annual Meeting of Stockholders of
The Dow Chemical Company to be held on May 15, 1997, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to beneficial ownership of the common stock as
of January 31, 1997, by each Director and all Directors and officers of
the Company as a group is contained in the definitive Proxy Statement
for the Annual Meeting of Stockholders of The Dow Chemical Company to
be on held May 15, 1997, and is incorporated herein by reference.
Neither the Company nor any of its Directors or officers is aware of
any person who beneficially owns in excess of 5 percent of the total
outstanding shares of Dow common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no such reportable relationships or related transactions in
1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The Company's 1996 Consolidated Financial Statements and the
Independent Auditors' Report are included in Item 8 of Part II.
2. Financial Statement Schedules.
The following Financial Statement Schedule should be read in
conjunction with the Financial Statements included
in Item 8 of this Annual Report on Form 10-K .
Page
Schedule II - Valuation and Qualifying Accounts 52
Schedules other than the one listed above are omitted because of
the absence of the conditions under which they are required or
because the information called for is included in the Financial
Statements or Notes thereto.
-50-
3. Exhibits---See the Exhibit Index on pages 54 and 55 of this
Annual Report on Form 10-K for exhibits filed with this Annual
Report on Form 10-K (see below) and for exhibits incorporated
by reference.
The Company will provide a copy of any exhibit upon receipt of
a written request for the particular exhibit or exhibits
desired and upon receipt of payment of an amount equal to a
charge of twenty-five cents for each exhibit page, with a
minimum charge of two dollars per request. All requests should
be addressed to the Vice President and Controller of the Company
at the address of the Company's principal executive offices.
The following exhibits listed on the Exhibit Index are
filed with this Annual Report on Form 10-K:
3(ii) A copy of the Bylaws of The Dow Chemical Company,
as re-adopted in full on February 13, 1997.
11 Computation of Earnings per Common Share.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter
of 1996.
The following trademarks of The Dow Chemical Company appear in
this report: Affinity, Aim, Calibre, Cyclotene, Derakane,
Dowlex, Dowtherm, Drytech, Duramate, Elite, Ethocel, GAS/SPEC,
Insite, Magnum, Methocel, Pulse, Questra, Saran, Saran Wrap,
Scan, Styrofoam, Styron, Versene, Voranol and Zetabon.
The following trademarks of DowBrands or an international
affiliate appear in this report: Fantastik, Glass Plus,
Scrubbing Bubbles, Spray'N Wash and Ziploc.
The following trademarks of DowElanco or its affiliates appear
in this report: Broadstrike, Clincher, Dursban, Lorsban and
Tracer.
The following trademark of Essex Specialty Products, Inc.
appears in this report: Betaseal.
The following trademark of Technipol appears in this report:
Spheripol.
The following trademark of BP Chemical appears in this report:
Innovene.
-51-
<TABLE>
<CAPTION>
SCHEDULE II SCHEDULE II
THE DOW CHEMICAL COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31
(In millions)
- ---------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions Deductions Balance
Beginning to from at End
Description of Year Reserves Reserves of Year
- ---------------------------------------------------------------------------------------------------------------
<S><S> <C> <C> <C> <C>
1996
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $53 $37 $19(b) $71
Other investments and noncurrent receivables 332 190(a) 14 508
Accumulated goodwill amortization 177 28 28 177
- ---------------------------------------------------------------------------------------------------------------
1995
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $104 $23 $74(b) $53
Other investments and noncurrent receivables 168 322(a) 158 332
Accumulated goodwill amortization 676 52 551(c) 177
- ---------------------------------------------------------------------------------------------------------------
1994
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $93 $33 $22(b) $104
Other investments and noncurrent receivables 177 43(a) 52 168
Accumulated goodwill amortization 563 139 26 676
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
1996 1995 1994
---------------------------------
<S><S> <C> <C> <C>
(a) Additions to reserve represent:
Charges to profit and loss $116 $263 $43
Miscellaneous other 74 59 0
---------------------------------
190 322 43
---------------------------------
(b) Deductions represent:
Notes and accounts receivable written off 9 16 12
Credits to profit and loss 3 2 6
Miscellaneous other 7 1 4
Sale of Pharmaceutical Businesses 0 55 0
---------------------------------
$19 $74 $22
---------------------------------
(c) Includes deduction of $551 due to sale of Pharmaceutical Businesses
-52-
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report
on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 25th day of March, 1997.
THE DOW CHEMICAL COMPANY
By: G. M. Lynch
----------------------------------
G. M. Lynch, Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed on the 25th day of March, 1997
by the following persons in the capacities indicated:
F. P. Popoff W. D. Davis
- ------------------------------------- ----------------------------------
F. P. Popoff, Director, Chairman W. D. Davis, Director
of the Board
W. S. Stavropoulos M. L. Dow
- ------------------------------------- ----------------------------------
W. S. Stavropoulos, Director, M. L. Dow, Director
President and Chief Executive Officer
J. P. Reinhard J. L. Downey
- ----------------------------------- ----------------------------------
J. P. Reinhard, Director, Executive J. L. Downey, Director
Vice President, Chief Financial
Officer
G. M. Lynch E. C. Falla
- ----------------------------------- ----------------------------------
G. M. Lynch, Controller E. C. Falla, Director
A. A. Allemang B. H. Franklin
- ----------------------------------- ----------------------------------
A. A. Allemang, Director B. H. Franklin, Director
J. K. Barton A. D. Gilmour
- ----------------------------------- ----------------------------------
J. K. Barton, Director A. D. Gilmour, Director
D. T. Buzzelli M. D. Parker
- ----------------------------------- ----------------------------------
D. T. Buzzelli, Director M. D. Parker, Director
A. J. Carbone H. T. Shapiro
- ----------------------------------- ----------------------------------
A. J. Carbone, Director H. T. Shapiro, Director
F. P. Corson P. G. Stern
- ----------------------------------- ----------------------------------
F. P. Corson, Director P. G. Stern, Director
J. C. Danforth
- -----------------------------------
J.C. Danforth, Director
-53-
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3(i) Restated Certificate of Incorporation of The Dow Chemical
Company, incorporated by reference to Exhibit 3(a) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
3(ii) A copy of the Bylaws of The Dow Chemical Company, as re-adopted
in full on February 13, 1997.
10(a) The Dow Chemical Company Executive Supplemental Retirement
Plan, incorporated by reference to Exhibit 10(a) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
10(b) The Dow Chemical Company 1969 Award Plan (included as part of
and incorporated by reference to the Prospectus contained in
The Dow Chemical Company's Registration Statement on Form S-7,
File No. 2-32525, filed April 7, 1969), as amended on
August 6, 1974 (incorporated by reference to Exhibit 41 to
The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1974), as amended on August 9, 1979
(incorporated by reference to Exhibit 4 to The Dow Chemical
Company Annual Report on Form 10-K for the year ended
December 31, 1979), as amended on October 30, 1987 (incorporated
by reference to Exhibit 10(j) to The Dow Chemical Company Annual
Report on Form 10-K for the year ended December 31, 1987).
10(c) The Dow Chemical Company 1972 Option Plan, as amended through
December 31, 1982 (included as a part of and incorporated by
reference to the Prospectus contained in Post-Effective Amendment
No. 13 to The Dow Chemical Company's Registration Statement on
Form S-8, File No. 2-44789, filed June 23, 1983).
10(d) The Dow Chemical Company 1976 Option Plan, as amended through
December 31, 1982 (included as a part of and incorporated by
reference to the Prospectus contained in Post-Effective Amendment
No. 8 to The Dow Chemical Company's Registration Statement on Form
S-8, File No. 2-55837, filed June 23, 1983).
10(e) The Dow Chemical Company 1979 Award and Option Plan, as amended
through May 1983 (included as part of and incorporated by
reference to the Prospectus contained in Post-Effective Amendment
No. 4 to The Dow Chemical Company's Registration Statement on
Form S-8, File No. 2-64560, filed June 23, 1983), as amended
April 12, 1984 (incorporated by reference to Exhibit 10(ff) to
The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1984), as amended April 18, 1985 (incorporated
by reference to Exhibit 10(fff) to The Dow Chemical Company Annual
Report Form 10-K for the year ended December 31, 1985), as amended
October 30, 1987 (incorporated by reference to Exhibit 10(j) to
The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1987).
10(f) The Dow Chemical Company Voluntary Deferred Compensation Plan
for Outside Directors, as amended effective as of July 1, 1994,
incorporated by reference to Exhibit 10(f) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended
December 31, 1994.
10(g) The Dow Chemical Company Executive Post Retirement Life
Insurance Program, incorporated by reference to Exhibit
10(g) to The Dow Chemical Company Annual Report on Form 10-K for
the year ended December 31, 1992.
10(h) The Dow Chemical Company Outside Directors' Pension Plan,
incorporated by reference to Exhibit 10(h) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1992.
10(i) A written description of the Management Achievement Recognition
System adopted on April 8, 1987 (incorporated by reference to
Exhibit 10(k) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1987).
-54-
EXHIBIT INDEX (Continued)
EXHIBIT NO. DESCRIPTION
10(j) The Dow Chemical Company Dividend Unit Plan, incorporated by
reference to Exhibit 10(j) to The Dow Chemical Company Annual
Report on Form 10-K for the year ended December 31, 1992.
10(k) The Dow Chemical Company 1988 Award and Option Plan (included
as part of and incorporated by reference to the Prospectus
contained in The Dow Chemical Company's Registration Statement
on Form S-8, File No. 33-21748, filed May 16, 1988), as amended
during 1991 (incorporated by reference to Exhibit 10(k) to The
Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1991), as amended effective as of January 1,
1997 (subject to stockholder approval and incorporated by
reference to Appendix A to the definitive Proxy Statement for
the Annual Meeting of Stockholders of The Dow Chemical Company
to be held on May 15, 1997).
10(l) The Dow Chemical Company Executive Award Plan, incorporated by
reference to Exhibit 10(l) to The Dow Chemical Company Annual
Report on Form 10-K for the year ended December 31, 1992.
10(m) The Dow Chemical Company Executive Split Dollar Life Insurance
Plan Agreement, as amended effective as of December 19, 1994,
incorporated by reference to Exhibit 10(m) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1995.
10(n) The Dow Chemical Company 1994 Executive Performance Plan,
incorporated by reference to the definitive Proxy Statement
for the Annual Meeting of Stockholders of The Dow Chemical Company
held on May 12, 1994.
10(o) The Dow Chemical Company 1994 Non-Employee Directors' Stock
Plan, incorporated by reference to Exhibit 10(o) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1994.
10(p) A written description of the one-time grant of shares of the
common stock of The Dow Chemical Company to non-employee
Directors, incorporated by reference to the definitive Proxy
Statement for the Annual Meeting of Stockholders of The Dow
Chemical Company held on May 11, 1995.
11 Computation of Earnings Per Common Share.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
-55-
EXHIBIT 3(ii)
THE DOW CHEMICAL COMPANY
BYLAWS*
(As re-adopted in full on November 21, 1985, effective December 1,
1985; and as amended February 13, 1986; October 9, 1986; May 14,
1987; November 12, 1987; July 11, 1991; November 12, 1992; April 8,
1993; February 10, 1994; April 14, 1994; July 14, 1994; February 8,
1996; and February 13, 1997.)
SECTION I
CAPITAL STOCK
Section 1.1. Certificates. Every holder of stock in the
Company shall be entitled to have a certificate signed in the name
of the Company by the Chairman of the Board of Directors or the
President or an Executive Vice President or a Vice President, and by
the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company, representing the number of
shares registered in certificate form. Any or all the signatures on
the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it
may be issued by the Company with the same effect as if such person
were such officer, transfer agent or registrar at the date of issue.
(As amended February 8, 1996.)
Section 1.2. Record Ownership. The certificates of each
class or series of a class of stock shall be numbered
consecutively. A record of the name and address of the holder of
each certificate, the number of shares represented thereby and the
date of issue thereof shall be made on the Company's books. The
Company shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof, and accordingly shall
not be bound to recognize any equitable or other claim to or
interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as
required by the laws of the State of Delaware.
Section 1.3. Transfer of Record Ownership. Transfers of
stock shall be made on the books of the Company only by direction
of the person named in the certificate or such person's attorney,
lawfully constituted in writing, and only upon the surrender of the
certificate therefor and a written assignment of the shares
evidenced thereby, which certificate shall be canceled before the
new certificate is issued.
Section 1.4. Lost Certificates. Any person claiming a stock
certificate in lieu of one lost, stolen or destroyed shall give the
Company an affidavit as to such person's ownership of the
certificate and of the facts which go to prove its loss, theft or
destruction. Such person shall also, if required by policies
adopted by the Board of Directors, give the Company a bond, in such
form as may be approved by the General Counsel or his or her staff,
sufficient to indemnify the Company against any claim that may be
made against it on account of the alleged loss of the certificate
or the issuance of a new certificate.
Section 1.5. Transfer Agents; Registrars; Rules Respecting
Certificates. The Board of Directors may appoint, or authorize any
officer or officers to appoint, one or more transfer agents and one
or more registrars. The Board of Directors may make such further
rules and regulations as it may deem expedient concerning the
issue, transfer and registration of stock certificates of the
Company.
Section 1.6. Record Date. The Board of Directors may fix in
advance a date, not exceeding sixty days preceding the date of any
meeting of stockholders, payment of dividend or other distribution,
allotment of rights or change, conversion or exchange of capital
stock or for the purpose of any other lawful action, as the record
date for determination of the stockholders entitled to notice of
and to vote at any such meeting and any adjournment thereof, or to
receive any such dividend or other distribution or allotment of
rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock, or to participate in any
such other lawful action, and in such case such stockholders and
only such stockholders as shall be stockholders of record on the
date so fixed shall be entitled to such notice of and to vote at
such meeting and any adjournment thereof, or to receive such
dividend or other distribution or allotment of rights, or to
exercise such rights, or to participate in any such other lawful
action, as the case may be, notwithstanding any transfer of any
stock on the books of the Company after any such record date fixed
as aforesaid.
-56-
SECTION II
MEETINGS OF STOCKHOLDERS
Section 2.1. Annual. The annual meeting of stockholders for
the election of Directors and the transaction of such other proper
business shall be held during the month of May each year at a time
and place, within or without Delaware, as determined by the Board
of Directors.
Section 2.2. Special. Special meetings of stockholders for
any purpose or purposes may be called only by the Board of
Directors, pursuant to a resolution adopted by a majority of the
entire Board of Directors, either upon motion of a Director or upon
written request by the holders of at least fifty percent of the
voting power of all the shares of capital stock of the Company then
outstanding and entitled to vote generally in the election of
Directors. Any such request by stockholders shall be delivered to
the Secretary and shall set forth (a) the purpose or purposes of
the meeting and a description of each proposed matter to be
approved or addressed at such meeting, including the text of any
proposed amendments to the Certificate of Incorporation or these
Bylaws, (b) the name and record address of the stockholder or
stockholders requesting the special meeting, and (c) the number of
shares of each class of stock of the Company that are beneficially
owned by such stockholders. At any such special meeting, only such
business may be transacted as is related to the purpose or purposes
set forth in the notice of meeting. Special meetings may be held
at any place, within or without Delaware. (As amended February 13,
1997.)
Section 2.3. Notice. Written notice of each meeting of
stockholders, stating the time, place and purpose thereof, shall be
mailed by the Secretary or an Assistant Secretary not less than ten
days nor more than sixty days before such meeting to every
stockholder entitled to vote thereat.
Section 2.4. List of Stockholders. A complete list of the
stockholders entitled to vote at any meeting of stockholders,
arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder, shall be prepared by the Secretary and shall be open
to the examination of any stockholder, either at a place within the
city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at
the place where the meeting is to be held, for at least ten days
before the meeting and at the place of the meeting during the whole
time of the meeting.
Section 2.5. Quorum. The holders of at least fifty percent
of the issued and outstanding stock of the Company entitled to vote
with respect to any one of the purposes for which the meeting is
called, present in person or represented by proxy, shall constitute
a quorum, except as otherwise required by the General Corporation
Law of Delaware. In the event of a lack of quorum, the chairman of
the meeting or a majority in interest of the stockholders present
in person or represented by proxy may adjourn the meeting from time
to time without notice other than announcement at the meeting,
until a quorum shall be obtained. At any such adjourned meeting at
which there is a quorum, any business may be transacted that might
have been transacted at the meeting originally called. (As amended
February 10, 1994.)
Section 2.6. Organization. The Chairman of the Board, or, in
the absence of the Chairman of the Board, the President, or, in the
absence of both, any Executive Vice President or Vice President,
shall preside at meetings of stockholders. The Secretary of the
Company shall act as secretary, but in the absence of the
Secretary, the presiding officer may appoint a secretary.
Section 2.7. Voting. Subject to all of the rights of the
Preferred Stock provided for by resolution or resolutions of the
Board of Directors pursuant to Article IV of the Certificate of
Incorporation or by the General Corporation Law of Delaware, each
stockholder shall be entitled to one vote, in person or by written
proxy, for each voting share held of record by such stockholder.
The votes for the election of Directors and, upon the demand of any
stockholder, the vote upon any matter before the meeting shall be
by written ballot. Except as otherwise required by the General
Corporation Law of Delaware or as specifically provided for in the
Certificate of Incorporation or these Bylaws, in any question or
matter brought before any meeting of stockholders (other than the
election of Directors), the affirmative vote of the holders of
voting shares present in person or by proxy representing a majority
of the votes actually cast on any such question or matter shall be
the act of the stockholders. Directors shall be elected by a
plurality of the votes of the voting shares present in person or
represented by proxy at the meeting and entitled to vote and
actually cast on the election of Directors. (As amended February
13, 1986, effective May 8, 1986, and further amended February 10,
1994.)
-57-
Section 2.8. Inspectors of Election. In advance of any
meeting of stockholders, the Board of Directors or the chairman of
the meeting shall appoint one or more inspectors to act at the
meeting and make a written report thereof. The chairman of the
meeting may designate one or more persons as alternate inspectors
to replace any inspector who fails or is unable to act. Each
inspector, before entering upon the discharge of his or her duties,
shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his
or her ability. The inspector(s) shall ascertain the number of
shares outstanding and the voting power of each, determine the
shares represented at the meeting and the validity of proxies and
ballots, count all votes and ballots, determine and retain for a
reasonable period a record of the disposition of any challenges
made to any determination by the inspector(s), and certify the
inspectors' determination of the number of shares represented at
the meeting and the count of all votes and ballots. The
inspector(s) may appoint or retain other persons or entities to
assist the inspector(s) in the performance of the duties of the
inspector(s). (As amended February 8, 1996.)
Section 2.9. Notification of Annual Meeting Business. Any
stockholder entitled to vote at an annual meeting of stockholders
may bring business before such a meeting only if (a) such business
is properly before the meeting pursuant to the laws of the State of
Delaware, and (b) written notification has been provided to the
Secretary at least 45 days prior to such meeting, either by
personal delivery or by United States mail, postage prepaid. Such
notification shall set forth: the name and address of the
stockholder, a representation that the stockholder is a holder of
record of Common Stock of the Company entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting,
any material interest of the stockholder in such business, a
description of the business proposed and the reasons for conducting
such business. (As adopted February 13, 1997.)
SECTION III
BOARD OF DIRECTORS
Section 3.1. Number and Qualifications. The business and
affairs of the Company shall be managed by or under the direction
of its Board of Directors. The number of Directors constituting
the entire Board of Directors shall be not less than six nor more
than twenty-one, as authorized from time to time exclusively by a
vote of a majority of the entire Board of Directors. As used in
these Bylaws,* the term "entire Board of Directors" means the total
authorized number of Directors that the Company would have if there
were no vacancies. Each Director shall at all times be a holder of
Common Stock of the Company. (As amended February 13, 1997.)
Section 3.2. Resignation. A Director may resign at any time
by giving written notice to the Chairman of the Board, to the
President or the Secretary. Unless otherwise stated in such notice
of resignation, the acceptance thereof shall not be necessary to
make it effective; and such resignation shall take effect at the
time specified therein or, in the absence of such specification, it
shall take effect upon the receipt thereof.
Section 3.3. Regular Meetings. Regular meetings of the Board
of Directors may be held without further notice at such time and
place as shall from time to time be determined by the Board of
Directors. A meeting of the Board of Directors for the election of
officers and the transaction of such other business as may come
before it may be held without notice immediately following the
annual meeting of stockholders.
Section 3.4. Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman of the Board or the
President or at the request in writing of one-third of the
Directors then in office.
Section 3.5. Notice of Special Meetings. Notice of the time
and place of each special meeting shall be mailed to each Director
at least two days before the meeting or telegraphed or telecopied
to such Director at least one day before the meeting. The notice
need not state the purposes of the special meeting.
Section 3.6. Place of Meetings. The Directors may hold their
meetings and have an office or offices outside of Delaware.
Section 3.7 Quorum. A majority of the total number of
Directors then holding office shall constitute a quorum. In the
event of lack of a quorum, a majority of the Directors present may
adjourn the meeting from time to time without notice, other than
announcement at the meeting, until a quorum shall be obtained.
Section 3.8. Organization. The Chairman of the Board, or, in
the absence of the Chairman of the Board, the President, or, in the
absence of both, a member of the Board selected by the members
present, shall preside at meetings of the Board. The Secretary or
an Assistant Secretary of the Company shall act as secretary, but
in the absence of the Secretary or an Assistant Secretary, the
presiding officer may appoint a secretary. (As amended February
13, 1997.)
-58-
Section 3.9. Compensation of Directors. Directors shall
receive such compensation for their services as the Compensation
Committee may determine pursuant to Section 4.4(a) of these Bylaws,*
or as the Board of Directors may determine. Any Director may serve
the Company in any other capacity and receive compensation therefor.
(As amended July 14, 1994.)
Section 3.10. Notification of Nominations. Nominations for
the election of Directors may be made by the Board of Directors or
by any stockholder entitled to vote for the election of Directors.
Any stockholder entitled to vote for the election of Directors at a
meeting may nominate persons for election as Directors only if
written notice of such stockholder's intent to make such nomination
is given, either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Company not later than (i)
with respect to an election to be held at an annual meeting of
stockholders, 90 days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of
stockholders for election of Directors, the close of business on the
seventh day following the date on which notice of such meeting is
first given to stockholders. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated, (b) a
representation that such stockholder is a holder of record of Common
Stock of the Company entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice, (c) a description of all
arrangements or understandings between such stockholder and each
nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be
made by such stockholder, (d) such other information regarding each
nominee proposed by such stockholder as would have been required to
be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had each nominee been
nominated, or intended to be nominated, by the Board of Directors,
and (e) the consent of each nominee to serve as a Director of the
Company if elected. The person presiding at any meeting of
stockholders may refuse to acknowledge the nomination of any person
not made in full compliance with the foregoing procedure. (As
adopted February 10, 1994, and amended February 13, 1997.)
SECTION IV
COMMITTEES OF THE BOARD
Section 4.1. Creation and Organization. The standing
committees of the Board of Directors shall be an Executive Committee;
an Audit Committee; a Compensation Committee; a Committee on
Directors; an Environment, Health and Safety Committee; a Finance
Committee; an Investment Policy Committee; and a Public Interest
Committee, having the respective duties assigned to each in this
Section IV and any other duties assigned to such committee by
resolution passed by a majority of the entire Board of Directors from
time to time. Each such standing committee shall consist of one or
more Directors and such other ex officio members as the Board of
Directors shall from time to time determine. The chairman of each
standing committee shall be one of such committee's members who shall
be designated as that committee's chairman by a majority of the
entire Board of Directors. Members of each standing committee shall
be elected by a majority of the entire Board of Directors at its
first meeting after each annual meeting of stockholders. Vacancies in
any standing committee shall be filled by a majority vote of the
entire Board of Directors. The Board of Directors may appoint
executive employees of the Company or its subsidiaries to be ex
officio members of any standing committee except the Executive
Committee. Ex officio members of standing committees shall be
entitled to be present at all meetings of their respective committees
and to participate in committee discussions, but shall not be
entitled to vote or be counted for quorum purposes. Each standing
committee shall fix its own rules of procedure and shall meet where
and as provided by such rules, but the presence of a majority of its
members shall be necessary to constitute a quorum. The Board of
Directors may from time to time appoint such special committees with
such powers and such members as it may designate in a resolution or
resolutions adopted by a majority of the entire Board of Directors.
(As amended February 8, 1996.)
Section 4.2. Executive Committee. During the intervals
between the meetings of the Board of Directors, the Executive
Committee shall possess and may exercise all the powers of the Board
of Directors in the management and direction of the business and
affairs of the Company to the fullest extent allowed by the General
Corporation Law of Delaware, including the power and authority:
(a) To authorize the issuance of stock;
(b) To the extent authorized in a resolution or resolutions
providing for the issuance of shares of Preferred Stock adopted
by the Board of Directors, to fix the designations and any of
the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the
Company or the conversion into, or the exchange of such shares
for, shares of any other class or any other series of any class
of stock of the Company, to fix the number of shares of any
series of Preferred Stock or to authorize the increase or
decrease of the shares of any series of Preferred Stock;
(c) To declare dividends on stock; and
-59-
(d) To adopt a certificate of ownership and merger in
accordance with the General Corporation Law of Delaware. The
Executive Committee shall consist of the officer who serves as
the chief executive officer pursuant to Section 5.17 and not
fewer than three other Directors. The Executive Committee
shall keep minutes of its meetings. (As amended April 14,
1994, and February 13, 1997.)
Section 4.3. Audit Committee. The Audit Committee shall:
(a) Prior to each annual meeting of stockholders, submit a
recommendation in writing to the Board of Directors for the
selection of independent auditors to be appointed by the Board
of Directors in advance of the annual meeting of stockholders
and to be submitted for ratification or rejection at such
meeting;
(b) Annually consult with the independent auditors with
regard to the proposed plan of audit and from time to time
consult privately with them and also with the Corporate
Auditor and the Controller with regard to the adequacy of
internal controls; and
(c) Upon completion of the report of audit by the independent
auditors and before the date of the annual meeting of
stockholders, (i) review the financial statements of the
Company, and (ii) meet with the independent auditors and
review with them the results of their audit and any
recommendations made to the management. (As amended April 8,
1993.)
Section 4.4. Compensation Committee. The Compensation
Committee shall consist of two or more members, all of whom shall
be "non-employee Directors" as defined in Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as
amended, or any future rule of the Securities and Exchange
Commission with respect to the same subject matter, and who also
comply with the rules for eligibility to serve as members of the
award and option committees hereinafter described. The Compensation
Committee may, with the consent of the Board of Directors, delegate
any portion of its authority to a subcommittee consisting of two or
more of its members.
(a) The Compensation Committee may establish rates of salary,
bonuses, retirement and other compensation for all Directors
and executive officers of the Company for purposes of the
Securities Exchange Act of 1934, as amended, or the
regulations of the Securities and Exchange Commission, and for
such other personnel as the Board of Directors may from time
to time delegate to it; provided, however, that no member of
the Committee may vote upon his or her own rate of salary or
his or her own bonus, retirement or other compensation except
for such items as are applicable to a group that also includes
personnel who are not Directors or officers, or where his or
her participation in such items is determined by formula; and
(b) The Compensation Committee shall exercise all functions
of the award and option committees under the Company's
incentive and option plans. (As amended July 14, 1994, and
February 13, 1997.)
Section 4.5. Committee on Directors. The Committee on Directors
shall:
(a) Recommend to the Board the individuals to constitute the
nominees of the Board of Directors for election at the next
annual meeting of stockholders and who will be named as such
nominees in the proxy statement used for solicitation of
proxies by the Board;
(b) Recommend and nominate an individual for Director to fill
the unexpired term of any vacancy existing in the Board of
Directors or created by an increase in the size of the Board;
(c) Conduct continuing studies of the size and composition of
the Board of Directors and from time to time make
recommendations to the Board for enlargement or reduction in
size of the Board; and
(d) Recommend and nominate individuals for election as
officers and members of Board committees. (As amended February
13, 1997.)
Section 4.6. Environment, Health and Safety Committee. The
Environment, Health and Safety Committee shall have the authority
and responsibility to assess all aspects of the Company's
environment, health and safety policies and performance and to make
recommendations to the Board of Directors and the management of the
Company with regard to promoting and maintaining superior standards
of performance. (As amended April 8, 1993.)
-60-
Section 4.7. Finance Committee. The Finance Committee shall
have the responsibility of periodically reviewing the financial
affairs of the Company and making recommendations to the Board of
Directors concerning the financial needs of the Company and the
methods of providing funds for such needs.
Section 4.8. Investment Policy Committee. The Investment
Policy Committee shall have the authority and responsibility to:
(a) Establish investment policy for The Dow Employees'
Pension Plan or any other retirement plan or fund maintained
by the Company for its employees or employees of its
subsidiaries ("Plans");
(b) Employ, replace, discharge and supervise, and review the
performance of trustees and investment advisers acting
pursuant to the Plans;
(c) Enter into, modify, alter, amend or revoke any existing
or future trust agreement or trust relating to the Plans;
(d) Review and advise upon the investment policy of, and
performance of trustees and investment advisers acting
pursuant to or on behalf of, any retirement plan or fund
maintained by any directly or indirectly wholly owned
subsidiary or subsidiaries of the Company for the benefit of
its or their employees or the employees of its or their
subsidiaries; and
(e) Perform similar duties with respect to such other
retirement or investment plan or fund, or on behalf of such
other entities affiliated with the Company, as the Board of
Directors from time to time shall designate. (As amended
November 12, 1992 and February 13, 1997.)
Section 4.9. Public Interest Committee. The Public Interest
Committee shall have the authority and the responsibility to assess
any and all aspects of the Company's decisions to determine their
social impact, as well as the responsibility to develop a worldwide
contributions program including an annual budget. The most socially
desirable alternatives for accomplishing the commercial objectives
of the Company and a program and annual budget for contributions
shall be recommended to the Board of Directors and the management
of the Company. Recognizing that positive perceptions of the
Company's policies and actions among its several constituencies are
extremely valuable assets, the Committee will keep itself informed
of these perceptions and will recommend to the Board and management
actions directed at continually enhancing the Company's public
image.
Section 4.10. Powers Reserved to the Board. No committee of
the Board of Directors shall have the power or authority to:
(a) Approve or adopt, or recommend to stockholders, any action
or matter expressly required by the General Corporation Law of
Delaware to be submitted to stockholders for approval; or
(b) Adopt, amend, or repeal these Bylaws.
No committee of the Board of Directors shall take any action
that is required by these Bylaws,* the Certificate of
Incorporation or the General Corporation Law of Delaware to be
taken by a vote of a specified proportion of the entire Board of
Directors. (As amended February 13, 1997.)
SECTION V
OFFICERS
Section 5.1. Designation. The officers of the Company shall
be a Chairman of the Board, a President, one or more Executive Vice
Presidents, one or more Vice Presidents, a Treasurer, one or more
Assistant Treasurers, a Secretary, one or more Assistant
Secretaries, a Controller, one or more Assistant Controllers and a
General Counsel. The Board of Directors also may elect or appoint,
or provide for the appointment of, such other officers or agents as
may from time to time appear necessary or advisable in the conduct
of the business and affairs of the Company. (As amended February
13, 1986.)
Section 5.2. Election and Term. At its first meeting after
each annual meeting of stockholders, the Board of Directors shall
elect the officers. The term of each officer shall be until the
first meeting of the Board of Directors following the next annual
meeting of stockholders and until such officer's successor is
chosen and qualified.
-61-
Section 5.3. Resignation. Any officer may resign at any time
by giving written notice to the President or the Secretary. Unless
otherwise stated in such notice of resignation, the acceptance
thereof shall not be necessary to make it effective; and such
resignation shall take effect at the time specified therein or, in
the absence of such specification, it shall take effect upon the
receipt thereof.
Section 5.4. Removal. Except where otherwise expressly
provided in a contract authorized by the Board of Directors, any
officer elected or appointed by the Board of Directors may be
removed at any time with or without cause by the affirmative vote
of a majority of the entire Board of Directors. (As amended
February 13, 1997.)
Section 5.5. Vacancies. A vacancy in any office may be
filled for the unexpired portion of the term by the Board of
Directors.
Section 5.6. Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the Board of Directors and
shall have such other powers and perform such other duties as may
be assigned by the Board of Directors. (As amended May 14, 1987;
November 12, 1987; November 12, 1992; effective December 1, 1992;
and April 14, 1994.)
Section 5.7. President. The President shall have such other
powers and perform such other duties as may be assigned by the
Board of Directors. (As amended May 14, 1987; November 12, 1987;
November 12, 1992, effective April 1, 1993; and April 14, 1994.)
Section 5.8. Executive Vice Presidents. The Executive Vice
Presidents shall assist the President in the management of the
business and affairs of the Company and shall perform such other
duties as may be assigned by the President or the Board of
Directors.
Section 5.9. Vice Presidents. Each Vice President shall have
such powers and perform such duties as may be assigned by the
President or the Board of Directors. The Board of Directors may
designate a Financial Vice President and one or more Vice
Presidents as Senior Vice Presidents or Group Vice Presidents.
Section 5.10. Treasurer. The Treasurer shall have charge of
all funds of the Company and shall perform all acts incident to the
position of Treasurer, subject to the control of the Board of
Directors.
Section 5.11. Assistant Treasurers. Each Assistant Treasurer
shall have such powers and perform such duties as may be assigned
by the Treasurer or the Board of Directors.
Section 5.12. Secretary. The Secretary or an Assistant
Secretary shall keep the minutes and give notices of all meetings
of stockholders and Directors and of such committees as directed by
the Board of Directors. The Secretary shall have charge of such
books and papers as the Board of Directors may require. The
Secretary or any Assistant Secretary is authorized to certify
copies of extracts from minutes and of documents in the Secretary's
charge, and anyone may rely on such certified copies to the same
effect as if such copies were originals and may rely upon any
statement of fact concerning the Company certified by the Secretary
or any Assistant Secretary. The Secretary shall perform all acts
incident to the office of Secretary, subject to the control of the
Board of Directors. (As amended February 13, 1997.)
Section 5.13. Assistant Secretaries. Each Assistant
Secretary shall have such powers and perform such duties as may be
assigned by the Secretary or the Board of Directors.
Section 5.14. Controller. The Controller shall be in charge
of the accounts of the Company. The Controller shall have such
other powers and perform such other duties as may be assigned by
the Board of Directors and shall submit such reports and records to
the Board of Directors as it may request.
Section 5.15. Assistant Controllers. Each Assistant
Controller shall have such powers and perform such duties as may be
assigned by the Controller or the Board of Directors. (As adopted
on February 13, 1986.)
Section 5.16. General Counsel. The General Counsel shall be
in charge of all matters concerning the Company involving
litigation or legal counseling. The General Counsel shall have such
other powers and perform such other duties as may be assigned by
the Board of Directors and shall submit such reports to the Board
of Directors as it may request. (As renumbered on February 13,
1986.)
Section 5.17. Designation of an Officer as the Chief
Executive Officer. The Board of Directors shall designate one of
the elected officers as the chief executive officer of the Company.
The chief executive officer shall be
in general and active charge of the business and affairs of the
Company. (As adopted April 14, 1994, and amended February 8, 1996.)
-62-
Section 5.18. Designation of an Officer as the Chief
Operating Officer. The Board of Directors may designate one of the
elected officers the chief operating officer of the Company with
such powers and duties as may be assigned by the Board of
Directors. (As adopted on April 14, 1994.)
Section 5.19. Compensation of Officers. The officers of the
Company shall receive such compensation for their services as the
Compensation Committee may determine pursuant to Section 4.4(a) of
these Bylaws.* (As renumbered on February 13, 1986, and April 14,
1994.)
SECTION VI
INDEMNIFICATION
Section 6.1. Mandatory Indemnification of Directors, Officers
and Employees. The Company shall indemnify, to the full extent
permitted by the laws of the State of Delaware, any person who was
or is a defendant or is threatened to be made a defendant to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the
fact that such person (a) is or was a Director, officer or employee
of the Company, or (b) is or was a Director, officer or employee of
the Company and is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding. Any repeal,
amendment or modification of this Section 6.1 shall not affect any
rights or obligations then existing between the Company and any then
incumbent or former Director, officer or employee with respect to
any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought based in whole or in
part upon such state of facts. (As amended February 13, 1986,
effective May 8, 1986; and July 11, 1991.)
Section 6.2. Permitted Indemnification of Directors,
Officers, Employees and Agents. The Company may indemnify, to the
full extent permitted by the laws of the State of Delaware, any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason
of the fact that such person (a) is or was a Director, officer,
employee or agent of the Company, or (b) is or was a Director,
officer, employee or agent of the Company and is or was serving at
the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action,
suit or proceeding. (As amended February 13, 1986, effective May 8,
1986.)
Section 6.3. Judicial Determination of Indemnification. Any
incumbent or former Director, officer or employee may apply to any
court of competent jurisdiction in the State of Delaware to order
indemnification to the extent mandated under Section 6.1 above. The
basis of such order of indemnification by a court shall be a
determination by such court that indemnification of the incumbent
or former Director, officer or employee is proper in the
circumstances. Notice of any application for indemnification
pursuant to this Section 6.3 shall be given to the Company promptly
upon the filing of such application. (As amended February 13, 1986,
effective May 8, 1986; and July 11, 1991.)
Section 6.4. Expenses Payable in Advance. Expenses incurred
by any Director or officer in defending or investigating a
threatened or pending action, suit or proceeding shall be paid by
the Company in advance of the final disposition of such action,
suit or proceeding, upon receipt of an undertaking by or on behalf
of the Director or officer to repay such amount if it ultimately
shall be determined that the Director or officer is not entitled to
be indemnified by the Company as authorized in this Section VI.
Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the Board of Directors
deems appropriate. (As amended February 13, 1986, effective May 8,
1986; and October 9, 1986.)
Section 6.5. Nonexclusivity. The indemnification and
advancement of expenses mandated or permitted by, or granted
pursuant to, this Section VI shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement
of expenses may be entitled under any Bylaw,* agreement, contract,
vote of stockholders or disinterested Directors or pursuant to the
direction (howsoever embodied) of any court of competent
jurisdiction or otherwise both as to action by the person in an
official capacity and as to action in another capacity while
holding such office, it being the policy of the Company that
indemnification of the persons specified in Sections 6.1 or 6.2
above as defendants shall be made to the fullest extent permitted
by the laws of the State of Delaware. The provisions of this
Section VI shall not be deemed to preclude the indemnification of
any person who is not specified in Sections 6.1 or 6.2 above, but
whom the Company has the power or obligation to indemnify under the
laws of the State of Delaware or otherwise. (As amended February
13, 1986, effective May 8, 1986; and October 9, 1986.)
-63-
Section 6.6. Insurance. The Company may purchase and
maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted
against and incurred by such person in any such capacity, or
arising out of the person's status as such, whether or not the
Company would have the power or the obligation to indemnify the
Director, officer, employee or agent of the Company against such
liability under the provisions of this Section VI. (As amended
February 13, 1986, effective May 8, 1986.)
Section 6.7. Definitions. For the purposes of this Section
VI references to "the Company" shall include, in addition to the
resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had
power and authority to indemnify its directors, officers and
employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Section VI with
respect to the resulting or surviving corporation as such person
would have with respect to such constituent corporation if its
separate existence had continued. The term "other enterprise" as
used in this Section VI shall include employee benefit plans.
References to "fines" in this Section VI shall include excise taxes
assessed on a person with respect to an employee benefit plan. The
phrase "serving at the request of the Company" shall include any
service as a Director, officer, employee or agent of the Company
that imposes duties on, or involves services by, such Director,
officer, employee or agent with respect to any employee benefit
plan, its participants or beneficiaries. (As amended February 13,
1986, effective May 8, 1986.)
Section 6.8. Survival. The indemnification and advancement
of expenses provided by, or granted pursuant to, this Section VI
shall continue as to a person who has ceased to be a Director,
officer, employee or agent of the Company and shall inure to the
benefit of the heirs, executors and administrators of such person.
(As amended October 9, 1986.)
SECTION VII
MISCELLANEOUS
Section 7.1. Seal. The corporate seal shall have inscribed
upon it the name of the Company, the year "1947" and the words
"Corporate Seal" and "Delaware." The Secretary shall be in charge
of the seal and may authorize a duplicate seal to be kept and used
by any other officer or person.
Section 7.2. Waiver of Notice. Whenever any notice is required
to be given, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Section 7.3. Voting of Stock Owned by the Company. Powers of
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Company may be
executed in the name of and on behalf of the Company by the
President, any Executive Vice President, any Vice President or the
General Counsel. Any such officer may, in the name of and on
behalf of the Company, take all such action as any such officer may
deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Company may own
securities and at any such meeting shall possess and may exercise
any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Company might have
exercised and possessed if present. The Board of Directors may from
time to time confer like powers upon any other person or persons.
Section 7.4. Executive Office. The principal executive
office of the Company shall be located in the City of Midland,
County of Midland, State of Michigan, where the books of account
and records shall be kept. The Company also may have offices at
such other places, both within and without Delaware, as the Board
of Directors from time to time shall determine or the business and
affairs of the Company may require.
SECTION VIII
AMENDMENT OF BYLAWS*
Section 8.1. The Board of Directors shall have power to
amend, alter, change, adopt and repeal the Bylaws* of the Company
at any regular or special meeting. The stockholders also shall have
power to amend, alter, change, adopt and repeal the Bylaws* of the
Company at any annual or special meeting subject to the
requirements of the Certificate of Incorporation.
* Spelling as amended April 8, 1993.
-64-
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands except for per share amounts)
Year ended December 31
1996 1995 1994
--------------------------------
Primary:
Average common shares outstanding 246,329 268,243 276,094
-------------------------------------------------------------------------
Net income available for
common stockholders $1,900,000 $2,071,000 $931,000
-------------------------------------------------------------------------
Net earnings per common share $7.71 $7.72 $3.37
-------------------------------------------------------------------------
Note:In computing primary earnings per common share, no adjustment was made
for the net effect of dilutive stock options. The aggregate dilution
produced by common stock equivalents, based on the treasury stock
method, is not material.
Fully Diluted:
Average common shares outstanding 246,329 268,243 276,094
Net effect of dilutive stock options
- based on treasury stock method using
the ending market price, if higher
than average market price 5,076 4,975 4,907
-------------------------------------------------------------------------
Total 251,405 273,218 281,001
-------------------------------------------------------------------------
Net income available for
common stockholders $1,900,000 $2,071,000 $931,000
-------------------------------------------------------------------------
Net earnings per common share $7.56 $7.58 $3.31
-------------------------------------------------------------------------
Note:The aggregate dilution produced by common share equivalents is not
material and accordingly the fully diluted earnings per common share
need not be reported in the Company's Financial Statements at
December 31, 1996.
-65-
EXHIBIT 21
SUBSIDIARIES OF THE DOW CHEMICAL COMPANY
At December 31, 1996
Location of Percent
Incorporation Owner-
or Organization* ship
The Dow Chemical Company Delaware
Arabian Chemical Company Limited Saudi Arabia 50
Arabian Chemical Company (Latex) Limited Saudi Arabia 50
DC Partnership Management Inc. Delaware 100
DowBrands L.P. (6) Delaware 1
DCOMCO, Inc. Delaware 100
DCU/LB Trust (1) California 50
Derivados Petroquimicos Soc. De Inversion S.A. Argentina 50
Destec Energy, Inc. Delaware 80
Alamo Land Company Louisiana 57
Atlantic Power, Inc. Delaware 100
Tri-State Peaker, L.P. (11) Texas 60
Black Mountain Cogen, Inc. Delaware 100
DCG, Inc. Delaware 100
Delta CoGen Limited Partnership (13) Texas 20
Delta CoGen, Inc. Delaware 100
Delta CoGen Limited Partnership (13) Texas 80
Demex, Inc. Delaware 100
Destec Energia de Mexico, S.A. de C.V.(14) Mexico 50
Demsa, Inc. Delaware 100
Destec Energia de Mexlco, S.A. de C.V.(14) Mexico 50
Destec Asia, Inc. Delaware 100
Destec Constructors, Inc. Delaware 100
Destec-Crockett, Inc. Delaware 100
Destec Energy Canada, Inc. Ontario 100
Blackhorse CoGen, Inc. Ontario 100
Houston Power Partners, Inc. Ontario 100
Kingston Power Partners, Inc. Ontario 100
Kingston Southern Lights Ontario 1
Limited Partner(15)
Kingston CoGen Ontario 50
Limited Partnership (16)
Kingston Northern Lights, Inc. Ontario 100
Kingston CoGen Limited Partnership(16) Ontario 50
Kingston Southern Lights Ontario 99
Limited Partnership (15)
Destec Operating Canada, Inc. Ontario 100
Destec Energy (Asia) Pte. Ltd. Singapore 100
Destec Energy Mexico, Inc. Delaware 100
Destec Europe, S.A. Netherlands 100
Destec Gas Properties, Inc. Delaware 100
Destec Gas Properties, L.P. (17) Texas 50
Destec Gas Services, Inc. Delaware 100
Destec Holdings, Inc. Delaware 100
BCC CoGen, Inc. Texas 100
Poso Creek Limited (25) Texas 50
Bear Claw CoGen, Inc. Delaware 100
Bear Mountain CoGen, Inc. Texas 100
Brea Canyon CoGen, Inc. Texas 100
CC CoGen, Inc. Texas 100
Chalk Cliff CoGen, Inc. Texas 100
CoGen Kern Bluff, Inc. Texas 100
CoGen Lime Rock, Inc. Texas 100
CoGen Lynchburg, Inc. Texas 100
CoGen Lyondell, Inc. Texas 100
*Primary location of organization is reported for partnerships.
-66-
Location of Percent
Incorporation Owner-
or Organization* ship
CoGen Poso Creek, Inc. Texas 100
PSE CC Investment, L.P. (26) Texas 1
Kern Front Investment, L.P. (27) Texas 1
PSE HS Investment, L.P. (28) Texas 1
Poso Creek Limited (25) Texas 50
CoGen Power, Inc. Texas 100
CoGen Power, L.P. (24) Delaware 97
Corona Energy Corporation California 100
CEC Prime, Inc. California 100
Destec Engineering Inc. Texas 100
Destec FSC Corp. (Barbados) Barbados 100
Destec Fuel Resources, Inc. Texas 100
Destec Gas Properties, L.P. (17) Texas 50
Destec Management Services, Inc. Texas 100
Destec Operating Company Texas 100
Double "C" CoGen, Inc. Texas 100
PSE CC Investment, L.P. (26) Texas 99
HEP CoGen, Inc. Texas 100
Harriman Energy Partners, Ltd. (29) Texas 60
Kern Front CoGen, Inc Texas 100
Kern Front Investment, L.P. (27) Texas 99
Live Oak CoGen, Inc. Texas 100
Northway CoGen, Inc. Texas 100
Harriman Energy Partners, Ltd. (29) Texas 40
Rio Grande CoGen, Inc. Texas 100
SJC CoGen, Inc. Texas 100
San Joaquin CoGen, Inc. Texas 100
Sierra CoGen, Inc. Texas 100
PSE HS Investment, L.P. (28) Texas 99
Destec Latin America Inc. Delaware 100
Destec Miskolc, Inc. Delaware 100
Destec North American Ventures Delaware 100
Chesapeake Power, Inc. New York 100
James River Energy Corp. Texas 100
Patowmack Power Partners, L.P. Virginia 99
Destec Power Metering Ltd Cayman Islands 100
Destec Power Services, Inc. Delaware 100
Destec Properties, Inc. Delaware 100
Destec Properties Limited Partnership(18) Nevada 1
Destec Sterling, Inc. Texas 100
Destec Taiwan Delaware 100
Destec Ventures, Inc. Delaware 100
Destec Properties Limited Partnership(18) Nevada 99
Dry Creek Power, Inc. Delaware 100
Dry Creek Power, L.P. (19) Georgia 80
European Power Holdings BV Netherlands 100
Terneuzen CoGen BV Netherlands 100
Florida CoGen Development, Inc. Delaware 100
Florida CoGen Gas Services, Inc. Delaware 100
Gasification Services, Inc. Delaware 100
Wabash Coal Gasification, Ltd. (20) Texas 40
Georgia Peaker, Inc. Delaware 100
Middle Georgia Peaker, L.P. (21) Georgia 20
Greenbay CoGen, Inc. Delaware 100
-67-
Location of Percent
Incorporation Owner-
or Organization* ship
Hart County IPP, Inc. Delaware 100
Hartwell Independent Power Partners, Inc. Delaware 100
Hispaniola Power Ventures, Ltd Cayman Islands 100
Lime Rock Energy, Inc. Delaware 100
Louisiana Gasification Technology, Inc. Delaware 100
MGP, Inc. (Georgia) Delaware 100
Middle Georgia Peaker, L.P. (21) Georgia 80
Michigan CoGen, Inc. Delaware 100
Michigan Power, Inc. Delaware 100
OCG CoGen, Inc. Delaware 100
Oyster Creek CoGen, Inc. Delaware 100
Palm Beach CoGen, Inc. Delaware 100
Piedmont (GP), Inc. Delaware 100
Piedmont Power Limited (22) Texas 60
Piedmont (LP), Inc. Delaware 100
Piedmont Power Limited (22) Texas 40
Pilgrim Power, Inc. Delaware 100
Polk County Cogen Delaware 100
Tiger Bay Limited Partnership (23) Delaware 50
Central Florida DGE, Inc. Delaware 40
Tiger Bay Limited Partnership (23) Delaware 1
Port Arthur CoGen, Inc. Delaware 100
CoGen Power, L.P. (24) Delaware 3
Sandy Creek Power, Inc. Delaware 100
Dry Creek Power, L.P. (19) Georgia 20
Tiger Bay Gas Services Delaware 100
Tri-State Peaker, Inc. Delaware 100
Tri-State Peaker, L.P. (11) Texas 40
UK Energy Holdings Limited Netherlands 100
Indian Queens Power Limited Netherlands 100
WR Coal Gasification, Inc. Delaware 100
Warsaw Transmission, Inc. Delaware 100
Dexco Polymers (1) Texas 50
Diamond Capital Management Inc. Delaware 100
Diamond Technology Partnership Company (7) Delaware 88
Chemtech Royalty Associates, L.P. (8) Delaware 81
Chemtech Portfolio Inc. Texas 100
Ifco Inc. Delaware 100
Dofinco, Inc. Delaware 100
Dow Quimica Latin America SA Uruguay 100
Dow Austria Ges. mbH Austria 100
Dow Centroamerica S./A. Costa Rica 100
Dow Centroamerica S/A Guatemala 100
Dow Chemical (Australia) Limited Australia 100
Dow Australia Superannuation Fund A Pty Ltd Australia 100
Dow Australia Superannuation Fund B Pty Ltd Australia 100
Dow Chemical Canada Inc. Canada 100
Dow Capital B.V. Netherlands 100
Dow International Financial Services Ireland 100
Dow Capital Public Limited Company Ireland 100
Dow International Service Center, NV Belgium 100
Dow Pipeline Ltd. Canada 100
DowBrands Canada Inc. Canada 100
Fort Saskatchewan Ethylene Storage Canada 50
Limited Partnership
H-D Tech Inc. (1) Canada 50
1069284 Ontario Inc. Canada 100
Dow Chemical (China) Ltd. Delaware 100
Dow Chemical Company Limited United Kingdom 100
Cromarty Petroleum Company Limited (1) United Kingdom 50
-68-
Location of Percent
Incorporation Owner-
or Organization* ship
Dow Chemical Delaware Corp. Delaware 100
Dow Chemical (Hong Kong) Limited Hong Kong 100
Dow Chemical International Inc. (Panama) Panama 100
Dow Chemical International Ltd. Delaware 100
Dow Chemical Thailand Limited Thailand 100
Petroquimica-Dow S.A. (Petrodow) Chile 70
Dow Chemical Japan Limited (10) Japan 88
Dow Chemical Korea Limited Korea 100
Dow Chemical (NZ) Limited New Zealand 100
Dow Chemical Pacific Limited Hong Kong 100
Ulsan Pacific Chemical Corporation Korea 80
Dow Chemical (Singapore) Private Limited Singapore 100
Dow Chemical Taiwan Ltd. Taiwan 100
Dow Credit Corporation Delaware 100
Dow Deutschland Inc. Delaware/German 100
Dow Chemical Inter-American Limited Delaware 100
Dow Quimica de Colombia S.A. (5) Colombia 10
Dow Deutschland Anlagengesellschaft GmbH Germany 100
Dow Hungary Chemicals Hungary 100
Limited Liability Company
Dow Portugal Produtos Quimicos S.A. Portugal 100
Dow Turkiye A.S. (3) Turkey 40
DowBrands GmbH Germany 100
Epoxital S.R.L. (1) Italy 50
Safechem Umwelt Service GmbH Germany 51
Dow Engineering Company Delaware 100
Dow Engineering, Inc. Michigan 100
Dow Environmental Inc. Delaware 100
Radian International LLC Delaware 60
Corporacion Radian, S.A. de C.V. Mexico 100
D-R Holding NV Netherlands 100
Ecobilan SA France 100
Ecoaudit SA France 100
Ecobalance Inc. Delaware 100
Ecobilan S.R.L. Italy 100
Dow Environmental Canada Inc. Canada 100
Dow Umweltservice GmbH Germany 100
Radian Ceramics Development Corporation Delaware 100
Radian Engineering, Inc. Delaware 100
Radian D-Tech Inc. Delaware 51
Radian International Canada Inc Canada 100
Radian International Pty Ltd Australia 100
Radian International S.A. Argentina 100
Radian Overseas Mgmt Co Delaware 100
Radian S.E.A. Limited Thailand 100
Radian Systems Corp. Delaware 100
Tecnologias y Sevicios Ambientales, Chile 55
Tesam S.A.
Dow Europe Holding N.V. Netherlands 100
DowBrands Holding GmbH Germany 100
Dow Belgium Belgium 100
Dow Benelux N.V. Netherlands 100
C&P Botlek International BV Netherlands 100
C&P Botlek International CV (4) Netherlands 10
C&P Botlek International CV (4) Netherlands 90
Polyol Belgium N.V. (30) Belgium 1
Rofan Automation and Information Netherlands 100
Systems B.V.
Dow Chemical Iberica S.A. Spain 99
DowBrands Espanola S.A. Spain 100
Transformadora De Estileno S.A. (1) Spain 50
-69-
Location of Percent
Incorporation Owner-
or Organization* ship
Dow Danmark A/S Denmark 100
Dow France S.A. France 100
DowBrands SA France 100
Dow Italia S.p.A. Italy 100
First Chemical Factoring SpA Italy 100
Dow Mideast Systems (2) Egypt 1
Dow Norge A/S Norway 100
Dow Polska Sp.z.o.o. Poland 100
Dow Southern Africa (Pty) Ltd. South Africa 100
Dow Suomi OY Finland 100
Dow Sverige AB Sweden 100
Polyol International B.V. Netherlands 100
Polyol Belgium N.V. (30) Belgium 99
Dow Europe S.A. Switzerland 100
Chemtech Royalty Associates, L.P. (8) Delaware 1
Dow Export S.A. Switzerland 100
Dow Mideast Systems (2) Egypt 1
Dow Turkiye A.S. (3) Turkey 1
Dow Factoring Company S.A. Switzerland 100
Dow Financial Holdings Inc. Delaware 100
Dow Financial Services Inc. Delaware 100
DowBrands L.P. (6) Delaware 38
Dow Holdings Inc. Delaware 100
Dow Corning Corporation (1) Michigan 50
Dow Hydrocarbons and Resources Inc. Delaware 100
Cayuse Pipeline, Inc. Texas 100
Dow Intrastate Gas Company Louisiana 100
Dow Pipeline Company Texas 100
Midland Pipeline Corp. Delaware 100
Fort Saskatchewan Ethylene Canada 50
Storage Corporation
Promix L.L.C. Texas 50
Dow Hellas A.E. Greece 100
Dow International B.V. Netherlands 100
Dow Kakoh Kabushiki Kaisha Japan 65
Dow MidEast Systems (2) Egypt 98
Dow Mitsubishi Chemical Ltd(1) Japan 50
Dow Quimica Argentina S.A. (9) Argentina 55
Dow Quimica Chilena S.A. Chile 100
Anticorrosivos Industriales Limitada (1) Chile 50
Dow Quimica de Colombia S.A. (5) Colombia 90
Dow Quimica Mexicana S.A. de C.V. Mexico 100
Dow Environmental de Mexico, S.A. de C.V. Mexico 100
Dow Quimica S.A. Brazil 100
Dow Quimica do Nordeste LTDA Brazil 100
EDN-Estireno Do Nordeste S A Brazil 68
EDN-Distribuidora Do Nordeste Ltda. Brazil 100
EDN-Poliestireno Do Sul Ltda. Brazil 100
Primera-Industria e Comercio Ltda. Brazil 100
Keytil Sociedad Anonima Uruguay 100
Dow Services Singapore Pte Ltd. Singapore 100
Dow Financial Holdings Singapore Pte Ltd. Singapore 100
S.H.A. Holdings Pte Ltd. Singapore 100
G.Z. Holdings Pte Ltd. Singapore 100
Dow Trading S.A. Switzerland 100
Dow Turkiye A.S. (3) Turkey 59
Dow Venezuela, C.A. Venezuela 100
CV Services Ltd. Cayman Islands 100
Dow-United Technologies Composite Products, Delaware 50
Inc. (1)
DowBrands Inc. Delaware 100
DowBrands L.P. (6) Delaware 31
-70-
Location of Percent
Incorporation Owner-
or Organization* ship
El Dorado Terminals Company (1) New Jersey 50
Ensign Equipment Company, Inc. Japan 100
Essex Chemical Corporation New Jersey 100
Pioneer Pharmaceuticals, Inc. New Jersey 100
Essex Specialty Products, Inc. New Jersey 100
Diamond Technology Partnership Company (7) Delaware 12
Essex Specialty Products, Inc., Canada Canada 100
Expandite-Essex Pty. Limited (1) Australia 50
Gurit-Essex A.G. (1) Switzerland 50
Etoxilados del Plata S.A. Argentina 100
FilmTec Corporation Delaware 100
Great Western Pipeline Company, Inc. California 100
HD Polyurethane Company (1) Korea 50
INCA International SpA Italy 80
Joliet Marine Terminal Trust Estate (1) Illinois 50
Latin American Pharmaceuticals, Inc. Delaware 100
Dow Quimica Argentina S.A. (9) Argentina 45
Lepetit International Inc. Panama 100
Liana Limited Delaware 100
Dorinco Insurance (Ireland) Ltd. Ireland 100
Dorinco Reinsurance Company Michigan 100
Dorintal Reinsurance Limited Bermuda 100
Timber Insurance Limited Bermuda 100
P.T. Dow Polymers Indonesia Indonesia 80
P.T. Pacific Indomas Plastic Indonesia (1) Indonesia 50
Petroquimica Bahia Blanca S.A.I.C. Argentina 63
Petrochemical Investment Co. Cayman Islands 50
Polisur S.A. Argentina 70
Productos Quimicos Peruanos S/A Peru 100
Raven Group Ltd. Delaware 100
Generon Systems Canada Canada 100
Rofan Services Inc. Delaware 100
Airco Generon Systems LP (1) Delaware 50
DH Compounding Company (1) Delaware 50
DowElanco Indiana 60
DERe Insurance Company Indiana 100
Dintec Agrichemicals Indiana 66
DowElanco Agricultural Products Limited Mauritius 100
DowElanco (Barbados) Limited Barbados 100
DowElanco China Ltd. Delaware 100
DowElanco International Ltd. Delaware 100
DowElanco (Thailand) Ltd. Thailand 100
Mycogen Corporation Indiana 52
DowElanco B.V. Netherlands 60
Dintec Agroquimica Produtos Quimicos Lda Portugal 66
Dow Chemical Japan Limited (10) Japan 12
DowElanco Argentina S.A. Argentina 100
DowElanco Asia Pacific Sdn Bhd Malaysia 100
DowElanco Australia Limited Australia 100
DowElanco Canada Inc. Canada 100
DowElanco Chile S.A. Chile 100
DowElanco Costa Rica S/A Costa Rica 100
DowElanco Danmark A/S Denmark 100
DowElanco de Colombia S.A. Colombia 100
DowElanco Export S.A. France 100
DowElanco GmbH Germany 100
DowElanco Guatemala S/A Guatemala 100
DowElanco Iberica S.A. Spain 100
DowElanco Industrial Ltda. Brazil 100
DowElanco Italia S.r.L. Italy 100
DowElanco Limited United Kingdom 100
-71-
Location of Percent
Incorporation Owner-
or Organization* ship
DowElanco (Malaysia) Sdn Bhd Malaysia 100
DowElanco Mexicana, S.A. de C.V. Mexico 100
DowElanco (NZ) Limited New Zealand 100
DowElanco Pacific Limited Hong Kong 100
DowElanco Paraguaya S.A. Paraguay 100
DowElanco Pfanzenschutzmittel Vertriebs Austria 100
G.m.b.H.
DowElanco S.A. France 100
DowElanco Southern Africa (Pty) Ltd. South Africa 100
DowElanco Sverige AB Sweden 100
DowElanco Taiwan Ltd. Taiwan 100
DowElanco Tarim A.S. Turkey 100
DowElanco Uruguay SA Uruguay 100
DowElanco Venezuela, C.A. Venezuela 100
P.T. Pacific Chemicals Indonesia Indonesia 100
Wenben, Inc. Delaware 100
DuPont Dow Elastomers L.L.C. (1) Delaware 50
Styron Asia Limited (1) Hong Kong 50
Sumitomo Dow Limited (1) Japan 50
Zhejiang Pacific Chemical Corporation (1) China 50
-72-
(1) Separate financial statements for these companies have been omitted
because of the absence of the conditions under which they are required.
(2) The Dow Chemical Company effective ownership of this company is 100%
of which The Dow Chemical Company owns 98%, Dow Europe Holding N.V.
owns 1% and Dow (Europe) S.A. owns 1%.
(3) The Dow Chemical Company effective ownership of this company is 100%
of which The Dow Chemical Company owns 59%, Dow Deutschland Inc. owns
40% and Dow (Europe) S.A. owns 1%.
(4) The Dow Chemical Company effective ownership of this company is 100%
of which Dow Benelux N.V. owns 90% and C&P Botlek International BV
owns 10%.
(5) The Dow Chemical Company effective ownership of this company is 100%
of which The Dow Chemical Company owns 90% and Dow Chemical
Inter-American Limited owns 10%.
(6) The Dow Chemical Company effective ownership of this company is
68.98% of which DowBrands Inc. owns 31.02%, Dow Financial Holdings Inc.
owns 37.92% and DC Partnership Management Inc. owns .04%
(7) The Dow Chemical Company effective ownership of this company is 100%
of which The Dow Chemical Company owns 88.4848% and Essex Specialty
Products owns 11.5152%.
(8) The Dow Chemical Company effective ownership of this company is
82.1627% of which Diamond Technology Partnership Company
owns 81.0972%, and Dow (Europe) S.A. owns 1.0655%.
(9) The Dow Chemical Company effective ownership of this company is 100%
of which The Dow Chemical Company owns 54.75% and Latin American
Pharmaceuticals, Inc. owns 45.25%
(10) The Dow Chemical Company effective ownership of this company is 95% of
which The Dow Chemical Company owns 87.5% and DowElanco B.V. (whose
effective ownership by The Dow Chemical Company is 60%) owns 12.5%.
(11) Destec's effective ownership of this company is 100% of which
Atlantic Power, Inc. owns 60% and Tri-State Peaker, Inc. L.P. owns 40%.
(12) This number intentionally left blank.
(13) Destec's effective ownership of this company is 100% of which DCG,
Inc. L.P. owns 20% and Delta CoGen,Inc. owns 80%.
(14) Destec's effective ownership of this company is 100% of which Demex,
Inc. owns 50% and Demsa Inc. owns 50%.
(15) Destec's effective ownership of this company is 100% of which
Kingston Power Partners, Inc. owns 1% and Destec Energy Canada, Inc.
owns 99%.
(16) Destec's effective ownership of this company is 100% of which
Kingston Northern Lights, Inc. owns 50% and Kingston Southern Lights
Limited Partnership owns 50%.
(17) Destec's effective ownership of this company is 100% of which Destec
Fuel Resources, Inc. owns 50% and Destec Gas Properties, Inc. owns 50%.
(18) Destec's effective ownership of this company is 100% of which Destec
Properties, Inc. owns 1% and Destec Ventures, Inc. owns 99%.
(19) Destec's effective ownership of this company is 100% of which Dry
Creek Power, Inc. owns 80% and Sandy Creek Power, Inc. owns 20%.
(20) This number intentionally left blank.
(21) Destec's effective ownership of this company is 100% of which MGP,
Inc. owns 80% and Georgia Peaker, Inc. owns 20%.
(22) Destec's effective ownership of this company is 100% of which
Piedmont (GP), Inc. owns 60% and Piedmont (LP), Inc. owns 40%.
(23) Destec's effective ownership of this company is 51.4% of which
Central Florida DGE, Inc. owns 1% and Polk County CoGen, Inc. owns
50.4%.
(24) Destec's effective ownership of this company is 100% of which CoGen
Power, Inc. owns 97.5% and Port Arthur CoGen, Inc. owns 2.5%.
(25) Destec's effective ownership of this company is 100% of which CoGen
Poso Creek, Inc. owns 50% and BCC CoGen, Inc. owns 50%.
(26) Destec's effective ownership of this company is 100% of which Double
"C" CoGen, Inc. owns 99% and CoGen Poso Creek, Inc. owns 1%.
(27) Destec's effective ownership of this company is 100% of which Kern
Front CoGen, Inc. owns 99% and CoGen Poso Creek, Inc. owns 1%.
(28) Destec's effective ownership of this company is 100% of which Sierra
CoGen, Inc. owns 99% and CoGen Poso Creek, Inc. owns 1%.
(29) Destec's effective ownership of this company is 100% of which
Northway CoGen, Inc. owns 40% and HEP CoGen, Inc. owns 60%.
(30) The Dow Chemical Company effective ownership of this company is 100%
of which Dow Benelux NV owns .5% and Polyol International BV owns 99.5%.
-73-
INDEPENDENT AUDITORS' CONSENT
The Dow Chemical Company:
We consent to the incorporation by reference of our report dated
February 12, 1997 appearing in this Annual Report on Form 10-K of
The Dow Chemical Company for the year ended December 31, 1996, in
the following Registration Statements of The Dow Chemical Company:
Form S-3:
Nos. 33-37052
33-44369
33-51673
33-52980
Form S-8:
Nos. 2-32525
2-44789
2-55837
2-64560
33-21748
33-37345
33-44603
33-51453
33-52841
33-56136
33-56138
33-56140
33-58205
33-61795
333-01771
333-01773
DELOITTE & TOUCHE LLP
Midland, Michigan 48640
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,903
<SECURITIES> 399
<RECEIVABLES> 3,056
<ALLOWANCES> 71
<INVENTORY> 2,815
<CURRENT-ASSETS> 9,830
<PP&E> 23,737
<DEPRECIATION> 15,253
<TOTAL-ASSETS> 24,673
<CURRENT-LIABILITIES> 6,004
<BONDS> 4,196
<COMMON> 818
128
0
<OTHER-SE> 7,136
<TOTAL-LIABILITY-AND-EQUITY> 24,673
<SALES> 20,053
<TOTAL-REVENUES> 20,053
<CGS> 14,108
<TOTAL-COSTS> 16,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> (494)
<INCOME-PRETAX> 3,288
<INCOME-TAX> 1,187
<INCOME-CONTINUING> 1,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,900
<EPS-PRIMARY> 7.71
<EPS-DILUTED> 7.71
</TABLE>
